Five strategic building blocks to beat auction challenges by Andy Strowbridge

There has been a global shift in wind energy support towards auctions, from feed-in tariffs with fixed prices for all qualifying projects. This has led to increased capacity of renewable electricity with reduced support costs. Although auctions are not the industry’s preferred model of support, they do shield developers from power price volatility for most of a project’s life, perhaps 15 to 20 years.

Auctions also bring some significant uncertainties and new challenges for project developers. For example, bid price submissions need to be based on a forecast of technology development, performance levels and likely cost reduction. As a result, bid success and long–term commercial viability of projects is dependent on getting these forecasts right. If you are not successful in one round of auctions, do you bid in subsequent rounds. And if you do, at what price?

Developers need several strategic building blocks to be in place to meet and beat these challenges.

  1.  They need to define a cost reduction strategy. This will identify the cost and performance improvements. This will not be a generic approach to cost reduction but one which makes the most of the strengths and synergies available to that developer. It will take account of foreseen innovations in wind turbines, balance of plant and operational practices: which innovations could be implemented when and what benefits will they have?
  2.  They need to be able to assess the likely winning price of the auction, based on reverse cost analysis of competitors’ recent bids and likely future bids from their project portfolios. Based on this assessment, targets for 1 may need to be made more ambitious…
  3.  The cost reduction strategy must then be translated into an operational plan. The developer needs to secure the right sites. Sites must fit with the key elements of the cost reduction strategy, such as: turbine size, project scale, wind speeds, distance to port or balance of plant costs.
  4. Likely revenue must be assessed. Each project requires a realistic assessment of energy production. The post-subsidy period requires a forecast of pricing many years into the future. It may also require the calculation of curtailment, grid charges, revenue from auxiliary network services or co-located generation facilities, access to future corporate PPAs and the impact of climate change on annual energy production over the next 20 to 30 years.
  5. Finally, the development portfolio must be optimally balanced to account for both the fit with any existing operational wind farms and the new risks inherent from auctions.

Even with the considerable resources developers often have at their disposal, it is always beneficial to look for independent outside help in developing and implementing these strategic building blocks. The right consultant will bring a wider base of knowledge, independence and fresh thinking, as well as a welcome challenge to the potential groupthink or confirmation bias that can develop in organisations. By using consultant expertise, developers can have much greater confidence that their auction strategy will deliver the right results for their business.

Andy Strowbridge

 

2018-10-02T16:16:09+00:0028/09/2018|Views|