The Energy Regulatory Commission (ERC) has released its proposed Green Energy Auction Reserve (GEAR) price for fixed-bottom offshore wind at ₱10.3859/kWh for the upcoming GEA 5 round (3.3 GW targeted for 2028–2030), equating to $177 (£132) / MWh. This will see offshore wind gathering pace in the Philippines. It is good to see ERC start it’s consultation process, and also that it has included PHP/USD exchange rate indexation. Maybe it should consider commodity indexation also, something we worked on for New York State.
This follows the positive news of Department of Energy Philippines’s (DOE) announcement of final auction terms for its first offshore wind-specific auction, one of the key recommendations of the World Bank Group’s Roadmap for Offshore Wind in the Philippines that we authored back in 2022.
The level of auction ceiling price should, in principle, enable a fully competitive auction and encourage offshore wind gathering pace in the Philippines. Our analysis suggests it should be possible to deliver the target early projects below this price.
The challenge is about the little word “should”:
- The auction is happening relatively early in the project development cycle, before permitting is complete and when port, transmission network and supply chain planning are at an early stage.
- This means that while exchange rates are compensated for, there remains much uncertainty regarding project size, energy production, supply chain and other factors that developers need to take a view on between now and eventual construction.
- This also means that there is a risk that consumers overpay for electricity from offshore wind in this first auction, due to uncertainty. To reduce such risks in future and encourage the fast reduction in levelized cost of energy from offshore wind, we encourage auctions to happen later in the project development cycle when more uncertainties have been retired.
But for this time round, I’m sure many are aware of the ‘winner’s curse’ in auctions – in short, where the winner overpays due to having the most optimistic assumptions, with those having more realistic assumptions losing out, but avoiding making a loss. There is a chance of this here, due to the high level of uncertainty. Our sense is that with 3.3 GW up for grabs there will be some competition, but not too much for a first auction. It remains true that offshore wind gathering pace in the Philippines.
We have seen OSW auction failures elsewhere due to too harsh terms or developers pulling out of projects later due to excessive cost increases between bidding and financial close. With ERC’s good work, we believe there is a reasonable chance of finding the balance between a fair price for consumers, enough reward for project owners needing to take their risks and a good chance that awarded projects get constructed. This depends now on both sufficient competition (driving cost down) and realism (avoiding loss-making scenarios) within bidders.
Clear heads and good advice needed – just BVG Associates’ sort of space. If you’re planning to bid in the Philippines, let’s talk about how we can help you secure a competitive position without falling to the winner’s curse.
