Analysis: Initial results of Portugal’s solar+storage auction

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The Portuguese government has revealed preliminary results from the nation’s second solar auction. It allocated 670 MW of solar capacity, instead of 700 MW, as initially planned, with the auction drawing the world’s lowest bid for a large-scale PV project at €0.01114 ($0.01316)/kWh.

The government press release contained incomplete information about the final outcome, but it made one thing clear: Large-scale solar auctions that include storage are becoming more and more sophisticated. But they are also helping to drive down costs for solar PV technology, while setting a benchmark for future procurement exercises across the world – particularly for energy systems with grid constraints.

Grid capacity

“In the Portuguese auction, developers competed for grid capacity for large-scale PV projects,” Michele Lauritano, senior consultant at UK-based Everoze, told pv magazine. “The Portuguese grid has limited grid capacity left available for generators at existing substations or at substations which are planned to be built in the next few years.”

The aim of the auction was to assign this limited capacity in 12 lots, with one for each area. They would include a set of substations, with available capacity to be located in the southern regions of Algarve and Alentejo.

However, this capacity had to be contracted by establishing a clear financial framework for investors with different financial models and risk appetites. It also had to produce significant revenue streams for the government or for the overall Portuguese Electricity System (SEN) throughout the 15-year span of the auction regime.

Three options

The auction rules were designed so each developer could specify their offers in three different ways. The Portuguese government defined these methods as storage modality, fixed contributions to the system, and contracts for difference.

“The options were mutually exclusive and each bidding option was implicitly determining different type of revenues for the electricity system and for the investor, although all bids could be compared in terms of net present value for the system, considering a 15-year term,” Lauritano explained.

This means that auction participants had to choose a bidding option but also maximize the net present value for SEN, while keeping their revenue in the first 15 years of operation below a minimum tolerability threshold for their financial model.

“The choice of bidding options implicitly indicated a different risk profile of the investor and the contract for difference option was the option with lowest price risk,” Lauritano said.

Solar+storage

The government said that the winning developers in the first category, with 483 MW of storage-linked PV, have agreed not to take an annual capacity premium set at €33,500/MW per year. Instead, they’ve offered to pay a capacity premium to the system of around €37,100/MW per year, on average.

In addition, the bidders have agreed to build storage systems for at least 20% of the requested capacity. They have also agreed to compensate the electricity system for high peak prices in the market over periods of 15 years.

“Basically, every time the spot price of electricity in Portugal is greater than a conventional strike price fixed in the auction rules, the winner with this option will have to pay the difference between peak and strike price to SEN for an amount which corresponds to 90% of the total capacity awarded for the PV plant,” Lauritano said.

However, it is hard to know how much this will cost investors over periods of 15 years.

“The winners of this option have probably made a bet on the fact that this cost will be very low or that it will be covered by the revenue they can obtain from the operation of the electricity storage system,” Lauritano explained.

One of the auction main winners, South Korea-based solar manufacturer Hanwha Q Cells, has confirmed that it secured grid capacity in return for paying a defined yearly capacity price to the Portuguese national grid operator over a period of 15 years.

“Thanks to the flexibility offered by coupling the solar with storage, Q Cells will be able to sell the electricity produced by the solar plant to merchants, undertake energy arbitrage by time shifting and participate in ancillary services markets in order to make the most out of these projects, while contributing to local grid stability,” the company said.

Felipe Canto Teixeira, solar PV engineer at Everoze, told pv magazine that the auction was so competitive that the winners had to reduce their remuneration to negative values.

“The price paid by the winners could appear high or even unsustainable if we limit the consideration to the first 15 years when the generators will have to compensate the system,” Teixeira said.

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However, winning developers have secured grid capacity beyond the 15-year term – effectively forever, in principle.

“They will have the possibility to hybridize the solar PV plant with other technologies which could allow the investor in the future to completely modify the financial model of the project,” Teixeira said. “So, taking this into account, probably the price paid could be partly justified.”

However, another positive outcome for the winners with this option would be that it is still partly unknown what revenue developers might secure through the operation of the storage system. Teixeira explained that bidders paid for capacity primarily to build the solar plants matched with that capacity.

“However, in the third bidding option of contract for difference, the bidder also committed to install a storage system with a power capacity of at least 20% of the awarded capacity and being able to operate continuously for at least one hour,” Teixeira said. “As an example, for a lot with 100 MW of capacity awarded under option three, the bidder will have to build at least 20 MW and be able to store at least 20 MWh.”

Fixed contributions and contracts for difference

Under the second bidding category – so-called fixed contributions to the system – the Portuguese government awarded 177 MW of PV capacity. Selected developers agreed to pay a fixed annual amount of €73,700 over 15 years for each megawatt of grid capacity they were awarded.

“The bidder will be able to sell electricity from the PV plant in the free market, so either at spot price in the electricity market or through a PPA with an off-taker,” Lauritano said. “Of course the bidder of this option expects implicitly that the market price in the next 15 years will remain sufficiently high to ensure that with income from solar PV plant generation they can both pay back the fixed compensation to the system and also have a sufficient cash flow for their financial model.”

Teixeira said that projects selected in this category will have to will have to pay more than €35/MWh of electricity back to the system for the first 15 years. And this amount will be relatively higher than the average price contribution of €22/MWh, which won the auction in 2019, as it is quite close to current market prices for electricity in Portugal.

“So, it is likely the winners with this option will have to use the majority of their revenue from sales of electricity in order to pay back this compensation,” Teixeira said. He added that around 157 MW of the capacity awarded under this bidding module was won by a retail supplier of electricity that might have a specific class of clients who are able to pay higher tariffs for electricity during peak hours of the day, when solar production is high.

Under the third option – contracts for difference – only 10 MW of capacity were assigned. The bidders ultimately selected a guaranteed price remuneration over 15 years, and in practice all energy will be sold to SEN for a fixed price similar to a power purchase agreement. It is in this bidding category that the auction recorded the world’s lowest price of €11.14/MWh.

Biggest winner

The auction’s biggest winner is the Portuguese government, as it has secured a way to maximize the value of scarce grid capacity.

“Other countries looking into creating new renewable auctions, like Spain at this stage, might find advantage in following similar recipe,” Lauritano said. “The extreme competition in access to limited grid capacity led participants to accept conditions that before this auction and that of the previous year seemed unsustainable to the majority of investors.”

The lifetimes of the PV plants will go beyond the 15-year terms. “The winners of the auction will likely accept low cash flows for their financial models during the first 15 years of operation when auction commitments will apply,” Teixeira said. “However, the financial models for PV plants are now extending to 30 or 35 years of lifetime and in this timeline it is expected these projects will be able to pay back their debts and costs and produce some returns.”

This means big players, and utilities in particular, will expand their dominance in similar auctions in the future.

“These companies have often a pool of clients with different price profiles and might be able to hedge on price risk by selecting a specific class of end customers,” Lauritano said.

He claimed that this procurement exercise marks the beginning of a new era for battery storage in Portugal.

“This will accelerate the reform of the balancing market in the country and the introduction of aggregators in line with European Union energy guidelines,” Lauritano said.

Given Portugal’s current renewables installation rate and its energy transition plans, it has the greatest potential to become one of Europe’s new battery-storage markets for grid services, along with Spain and Italy. These countries are now potentially poised to follow the examples that have already been set by the United Kingdom and Ireland.

Felipe Canto Teixeira and Michele Lauritano are consultants at Everoze and are active in the Spanish and Portuguese markets. Everoze is a technical and commercial consultancy specialized in renewable energy, storage and wider flexibility. The company was originally founded in the UK and has offices also in France and Spain.

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