Europe's power auction atrocity

Lenz Blog

The EU Commission may think that their illegal power grab ordering Germany around in the latest round of reform of the Law on Priority of Renewable Energy was a success.

And, on the surface, it was. Congratulations to the Commission, they did manage to have a larger influence on the final legislation than the German Bundesrat. Their idea of giving up the resoundingly successful feed-in tariff in Germany and introduce a system based on auctions has found its way into the final text of the law.

But this victory comes at a price.

For one, it is clear to anyone paying attention that the Commission has blatantly overstepped their competences. If you are interested in the legal details of that I recommend the latest paper from the Stiftung Umweltenergierecht (in German). There is just no reasonable doubt possible about the fact that this is a major constitutional crisis for German democracy.

When the feed-in tariff was enacted in the first place, that was done by a democratically elected coalition of the Green and the Social Democrat Parties. When it was ended in 2014, it was done on orders from the Commission, who is not democratically elected by anyone, and who has no business whatsoever to give the German legislators any orders in this situation.

In basic Constitutional theory, the Commission is part of the executive force. Giving them the power to legislate instead of Parliament is a serious violation of basic Constitutional values. Having them grab that power when they don’t have it in the first place makes this even worse.

That in turn makes it very hard to accept this introduction of an auction model for me. I was not convinced of its merits in the first place. But the fact of this illegal power grab actually succeeding makes me feel something close to seething hot anger at this failed policy.

Not a good place to start from. But now comes the fun part.

The German legislation until now was only a starting point setting a framework for the introduction of an auction model. To actually pull it off, there remains quite a lot of work to do and details to discuss.

Who is going to be responsible for the auctions? What exactly is the model for such an auction? Are people bidding in such an auction trying to form a contract with the entity who holds it? Are sanctions for someone winning an auction but failing to follow through a penalty for breach of contract (Vertragsstrafe) or an administrative sanction?

This will be one big, complicated mess. Good luck with trying to pull this off in the first place. It will, of course, be completely impossible to reduce costs with such a stupid basic idea.

Factors raising costs going forward are easily identified. Everyone brave enough to still consider building any solar project in Germany will need to hire a couple of lawyers to wade through the thousands of pages of regulations needed to actually pull an auction system off. It introduces a huge new layer of complexity.

Then they will need to pay their banks double of the interest they needed to pay under an easily understood and reliable feed-in tariff, because the bank will correctly perceive the risk as much higher. There is the completely new risk of failing to succeed with any bid. There is the completely new risk of having to pay high penalties because the project gets delayed for one reason or another.

The German Ministry of Economy is now in the process of trying to figure out how to do auctions for large-scale solar projects in a first experimental phase. And they are asking for comments.

I am not going to comment there, since that might possibly help with improving the auction model, which is the last thing I want. I want them to test their stupid idea and fail spectacularly.

But I note with interest a long paper the Ministry has commissioned, which discusses some of the possible alternatives. That paper states on page nine that they expect the resulting price for large scale solar projects to be higher than the feed-in tariff in place right now. They note correctly that the transition to an auction model introduces a whole new set of costs, which will make the whole exercise more costly than a feed-in tariff model.

The fun part I was referring to earlier is this: Now an auction model gets its chance at bat. It will fail, of course, like it has failed almost everywhere else it has been tried. But we will see for the first time how utterly and indisputable that failure will be and have an opportunity to compare it to the feed-in tariff system in place until now.

There are basically three ways to measure the failure. One is the amount of cost added by the transition to an auction model. That will remove the idea behind this kind of thinking that auction models help to reduce costs. The costs will increase, as the study states at page nine. The only question is by how much.

The second is the complexity of the system. The study notes as one of their goals to find a system easily understood by citizens, so as to have citizens accept the transition to this model. They also note that this will be quite a challenge, considering the failure of this model in many foreign countries, and that the system needs to be transparent and easily understandable to achieve acceptance (page 10).

Their problem there is that it is completely impossible to build a “transparent and easily understandable” auction system. One of the big advantages of feed-in over auction is that the system is much easier to understand. No amount of tweaking at the details will ever change this fundamental disadvantage of auctioning.

And the third metric to measure the failure will be the volume of projects actually installed under an auction system. I am not sure how that will play out.

Of course, the auction system will by definition be unable to deliver more projects than the volume up for auction. But it may very well fail to deliver even that low volume for one reason or another. It depends on how much the system fails in reducing costs if that happens or not.

An auction system by definition allows bidders to enter high prices, so maybe the additional costs will get so high that some substantial volume will get installed by some brave souls still not terrified by the 1001 pages of legalese and the new sanctions introduced for failing to follow through on time.

And of course, I may be wrong in my assessment. Maybe the experiments with this idea will show that costs really go down, like the Commission and the German coalition parties seem to think.

Then they can build on that success and extend the auction model to rooftop solar systems in 2017. That should be even more fun to watch.

Originally published on the Lenz Blog. Reproduced with permission.