Renewable Energy Auctions in Latin America and the Caribbean

This project is funded by the Global Environment Facility

Document elaborated by:

Factor (2017)

Colón de Larreátegui, 26, 48009 Bilbao, Bizkaia (España)

www.wearefactor.com

[email protected]

The following members of Factor’s team have participated in the elaboration of this document:

Hugo Lucas, Director of the Energy Department.

Juan Carlos Gómez, Consultant.

This document has received the contributions of:

Luiz Augusto Barroso, Daniel Bouile, Pablo del Río, Oscar Ferreño, Cornelia Marschel, Miquel Muñoz y Rebeca Ramírez

This project is funded by the Global Environment Facility (GEF).

This document is part of the project “Mecanismos y redes de transferencia de tecnología relacionada con el Cambio Climático en América Latina y el Caribe” (ATN/FM-14384-RG). All rights reserved. No part of this document can be copied or reproduced in any form without consent from the Inter-America Development Bank.

The English version is a translation of the original in Spanish for information purposes.

Index

General Index

Acronyms ______8

Executive Summary ______10

1. Introduction ______16

1.1. Status of renewable energy in Latin America and the Caribbean ______16

1.2. Status and trends in electricity auctions from renewable energy in the Latin America and the Caribbean region ______18

2. Design options for electricity auctions from renewable enegy sources ______21

2.1. Objectives in renewable energy ______21

2.2. Regularity and periodicity of auctions ______22

2.3. Actors and responsibilities ______22

2.4. Auction type ______22

2.5. Object to auction ______23

2.5.1. Volume of the auction ______23

2.5.2. Energy or capacity ______24

2.5.3. Power purchase agreement characteristics ______24

2.5.4. Other considerations ______24

2.6. Source of funds ______24

2.7. Eligible technologies ______25

2.8. Size of projects ______25

2.9. Site specific or neutral ______25

2.10. New vs. existing projects ______26

2.11. Face-to-face vs on-line ______26

2.12. Prequalification ______26

2.13. Tender requirements ______26

2.14. Local content ______27

2.15. Information provided ______27

2.16. Selecting the winning projects ______27

2.17. Determination of the final price ______29

2.18. Ceiling prices ______29

2.19. Minimum offer and invalidity clause. ______30

2.20. Guarantees ______30

2.21. Penalties for non-compliance or delays ______30

2.22. Design options for achieving secondary objectives ______31

3. Renewable Energy Auctions: Case Studies ______34

3.1. Selection of case studies ______34

3.2. Brazil ______36

3.2.1. Introduction ______36

3.2.2. Regulatory framework ______37

3.2.3. Support systems for renewable energy ______39

3.2.4. Brazilian auction system ______40

3.2.5. Types of electric power auctions in Brazil ______40

3.2.6. Description of the auction system ______42

3.2.7. Results of renewable energy auctions in Brazil ______47

3.2.8. Discussion and lessons learned. ______51

3.3. Panama ______54

3.3.1. Introduction ______54

3.3.2. Regulatory framework ______55

3.3.3. Support systems for renewable energy ______55

3.3.4. Description of the Panama Renewable Energy Auction System ______59

3.3.5. Results of renewable energy auctions in Panama. ______63

3.3.6. Discussion and lessons learned. ______68

3.4. Uruguay ______70

3.4.1. Introduction ______70

3.4.2. Regulatory Framework ______71

3.4.3. Support systems for renewable energy ______71

3.4.4. Description of the auction system ______73

3.4.5. Results of renewable energy auctions in Uruguay ______77

3.4.6. Discussion and lessons learned. ______81

3.5. Auctions 2016: Peru, Mexico and Argentina ______84

3.5.1. Peru's fourth renewable energy auction ______84

3.5.2. Mexico's first long-term auction ______87

3.5.3. First RenovAR auction in Argentina ______91

4. Renewable Energy Auctions Systems: Discussion and Recommendations ______95

4.1. Discussion ______95

4.2. Recommendations ______96

5. Bibliography ______101

Annex I: Institutional framewok, Brazil ______103

Annex II: Institutional framewok, Panama ______106 Annex III: Institutional framewok, Uruguay ______108

Table index

Table 1: Renewable auctions in LAC. ______18 Table 2: Renewable auctions in LAC in 2016.______20 Table 3: Assessment criteria in renewable auctions. ______28 Table 4: Design options and secondary objectives. ______31 Table 5: Socio-economic indicators for Brazil, Panama and Uruguay.______34 Table 6: Installed capacity as of December 2015: Brazil, Panama and Uruguay. _____ 35 Table 7: Main features of SEB over time. ______38 Table 8: Renewables in new energy auctions in Brazil. ______42 Table 9: Design of renewable energy auctions in Brazil (for new energy). ______45 Table 10: Auction results for wind projects in Brazil. ______48 Table 11: Auction results for solar photovoltaic projects in Brazil. ______50 Table 12: Support schemes for renewable energy in Panama. ______57 Table 13: Mandatory contracting obligations for distribution companies in Panama. _ 59 Table 14: Design of renewable auctions in Panama. ______62 Table 15: Renewable energy auctions in Panama. ______64 Table 16: Result of renewable energy auctions in Panama. ______67 Table 17: Design elements of wind power auctions in Uruguay. ______76 Table 18: Result of electricity auctions form renewable energy sources in Uruguay. __ 80 Table 19: Minimum prices for renewable energy resources Peru (US$/ MWh). ______84 Table 20: Design elements of the 4th renewable energy auction in Peru. ______84 Table 21: Minimum and ceiling prices from the 4th renewable energy auction in Peru. 86 Table 22: Design elements of the first long-term auctions in Mexico. ______87 Table 23: Design elements of the 2016 renewable electricity auction in Argentina. __ 91 Table 24: Results of the first RenovAR auction ______93 Table 25: First RenovAR auction prices (US$/ MWh). ______94 Table 26: Recommendations for the design of renewable energy auctions. ______96 Table 27: Institutional framework of the Brazilian electricity sector. ______103 Table 28: Institutional framework of the Panamanian electricity sector. ______106 Table 29: Institutional framework of the Uruguayan electricity sector. ______108

Figure Index

Figure 1: Investments in renewable energy in LAC (excl. large hydropower). ______17 Figure 2: Prices and capacities of wind auctions. ______49

Acronyms

ACL Free Contracting Environment of Brazil ACR Regulated Contracting Environment of Brazil ADME Electrical Market Administration of Uruguay ANEEL National Electric Energy Agency of Brazil ASEP National Authority of Public Services of Panama BNDES Development Bank of Brazil BNEF Bloomberg New Energy Finance CAMMESA Management Company of the Wholesale Electric Market of Argentina CCEE Chamber of Commercialization of Electric Energy of Brazil CDE Energy Development Fund of Brazil CEL Clean energy certificate CENACE National Energy Control Center of Mexico CEPEL Center of Investigation of the Electric Energy of Brazil CMSE Electricity Sector Monitoring Committee of Brazil CND National Dispatch Center of Panama CNPE National Council for Energy Policy of Brazil CNRH National Water Resources Council of Brazil CPI Consumer price index DNE National Energy Directorate of Uruguay EGESA Empresa de Generación S.A. of Panama EPE Energy Research Company of Brazil ETESA Empresa de Transmisión Eléctrica S.A. of Panama FAJU Adjustment factor. Fraction of energy price subject to adjustments due to inflation. Fomin Multilateral Investment Fund GCPS Coordinating Group for the Planning of Electrical Systems of Brazil GDP Gross Domestic Product HDI Human development Index Ibama Brazilian Institute of Environment and Renewable Natural Resources ICMS Tax on the Circulation of Goods and Services IPCC Intergovernmental Panel on Climate Change IRENA International Renewable Energy Agency IRHE Institute of Hydraulic Resources and Electrification of Panama LAC Latin America and the Caribbean MIEM Ministry of Industry Energy and Mining of Uruguay MME Ministry of Mines and Energy of Brazil MMEE Wholesale Electricity Market of Uruguay NCRE Non-conventional renewable energy OER Office of Rural Electrification of Panama ONS National Electrical System Operator of Brazil PDEE Ten Year Energy Expansion Plan of Brazil PNE National Energy Plan 2015-2050 of Panama PPA Power purchase agreement PPP Public private partnership PROINFA Incentive Program for Alternative Sources of Electric Energy of Brazil PV Photovoltaic RECAI Renewable Energy Country Attractiveness Index

REN21 Renewable Energy Network for the 21st Century RenovAR Renewable Energy Plan of Argentina RE Renewable Energy RP Reserve power auction (Brazil) SEB Brazilian Electrical System SEE Secretariat of Electric Power of Brazil SEN National Secretariat of Energy of Panama SHP Small hydroelectric plant SIN National Interconnected System (Brazil) TOCAF Accounting Text and Financial Management of Uruguay UDI Investment Unit of Mexico URSEA Regulatory Unit of Energy and Water Services of Uruguay USA United States of America US$ American dollar UTE National Administration of Power Plants and Transmissions of Uruguay VAT Value Added Tax

Executive Summary

Large-scale development of renewable energy requires a clear and stable policy with medium- and long-term objectives as well as conducive conditions for investment (legal security, access to capital, etc.).

The development of large-scale renewable energy does not depend so much on one specific support instrument, but on the combination of several as well as on their design, adapted to national conditions. The instruments need to facilitate aspects such as grid access and connection or access to finance.

Latin America and the Caribbean (LAC) has been a pioneer region in the implementation of the auction mechanism to set the remuneration for the electricity generated from renewable sources. In addition, auctions are the most popular regulatory instrument for the deployment of renewable energy in Latin America.

The analysis of auctions in the LAC region suggests that it is an adequate mechanism to promote wind and, in particular, PV projects because these projects are easy to develop and implement, can be standardized and, there is an increasing number of companies competing worldwide. On the other hand, the use of auctions to promote biomass projects, which demand greater investment in the project development stage, does not show obvious advantages over other mechanisms, such as feed-in tariff, nor a reduction of the price (efficiency), nor a greater number of projects developed (effectiveness). In addition, auctions reflect the rapid reduction of the cost of disruptive technologies, such as PV and wind, in the course of their learning curve, which is not as pronounced in mature technologies, as those used for the electricity generation from biomass.

One of the strengths of auctions is their flexibility: the possibility to tailor their design to the existing market conditions, electrical system and the renewable energy expansion targets. Regarding the design, renewable energy auctions in the LAC region show a clear tendency towards sophistication and refinement to achieve further objectives beyond awarding contracts at the minimum price. Among the secondary objectives are: industrial development and employment generation; integration of renewable generation in the grid; integration in the electricity market (recognizing the intrinsic value of the energy delivered in the zones and the timeframes where there is a deficit); diversity of participating actors; optimal location of projects; and mitigation of environmental impacts.

Although auctions will have to be tailored each time, the efficiency in the auction is based on ensuring a high degree of competition, in this respect are key: medium and long term renewable targets, regularity in holding the auctions and applying the highest transparency in the process.

One of the main criticisms of auctions is their effectiveness. With a high rate of competition, there is a tendency to underbidding which eventually results in failed projects. In this regard, the following are the three most important aspects to be

requested: financial guarantees, a certain degree of development of the projects and technical and financial reputation of the bidder.

The table below summarizes the best practices identified in this report for each of the design elements of the auction.

Design elements Description

RE Objectives The existence of renewable energy (RE) targets is a key aspect for the confidence of the project developers, which can be found in all the case studies analysed.

Ideally RE targets should be ambitious but realistic, detailed by technology, formally linked to auctions and with well-known review and updating process.

Regularity / The regularity establishes the bases of the trust for the investors, and periodicity it brings in an increase of the competitiveness, which allows a dynamic efficiency. Brazil or Peru, where auctions have been carried out regularly, are clear examples. While the renewable energy industry notes that it is important to publish a multiannual calendar with dates of auctions and volumes to be auctioned (Solar Power Europe 2016), this is a very ambitious exercise.

Having a regularity, and announcing the auction well in advance to give time to prepare a competitive offer, appear to be sufficient and necessary conditions to promote competition.

The experience of auctions in LAC clearly indicates that a series of auctions over time is preferable to auctioning once the same volume. It increases competition and therefore efficiency and, in addition, allows to adapt the design between auctions.

It is critical that the responsibilities and obligations of all institutions Responsible involved in the process are defined by law. Authority The responsible authority must be seen as independent and has to have the needed human, technical and financial resources. In the case of Brazil (ANEEL), Uruguay (URSEA) and Peru (OSINERGMIN) have opted for the regulator.

Object to auction The winners are awarded with a power purchase agreement (PPA) at the price resulting from the auction process. The details of the PPA have to be known in advance (preferably include the standard PPA as one annex in the tender documents). Long-term PPA, in US$ and indexed annually, offer the best guarantees to close the financing.

Design elements Description

In all the cases studied, the amount to auction was on energy. Although establishing the amount to be auctioned in energy implies a greater risk to the bidder, compared to capacity, this has not been decisive.

To make a PPA credible, funds must be assured. The best practice is Source of the to transfer by law the cost of PPAs to the regulated tariff. Brazil, funds to pay the Panama and Uruguay follow this principle. PPA

If the aim is to promote renewables in the most efficient way in the Technology short term, auctions should be open to all renewable technologies. specific vs neutral If diversification, security of supply and dynamic efficiencies (greater medium- and long-term price reductions) are sought, then technology specific auctions should be used with quotas for each renewable technology. Interesting discussions have started in Panama on allowing project developers to include several technologies in the same bid, that would decrease output variability and increase availability.

The importance of the location is very different in each country and Site specific vs will depend among other factors on: the size of the country; the neutral transmission infrastructure; the potential of the renewable energy resource, the location and diversity of renewable resources; potential problems of social acceptance, etc. If economic efficiency is sought, the auction must be neutral with respect to the location of the projects. In cases where the dispersion of projects is pursued, in order to avoid congestion in the transmission network, avoid social rejection, maximize rural development, etc., it is possible to identify specific sites for the projects or, most commonly, to do a zoning exercise with quotas.

It is recommended that restrictions to the size of the projects are Size of the determined by external factors such as the capacity of the projects transmission grid or environmental regulations, but not necessarily by the design of the auction.

Sealed-bid is simple to implement, is the most popular and has given Type of auction optimum results.

Design elements Description

Facilitating access to information on administrative procedures and on the transmission system, reduces the cost of preparing the bid. In cases where resource maps were given, as in Uruguay and other international experiences, it has favoured competition and the presentation of better and more developed projects and, therefore, more bankable.

With the objective to reduce underbidding: Requirements • Requirements for developers: in addition to administrative, legal and financial requirements is recommended to prove experience in similar projects. • Requirements for project, and adapted for each technology: connection permit, resource assessment, environmental impact assessment.

From the economic point of view selection must be based on the Selection criteria lowest price. of winning bids In order to achieve secondary objectives: the early entry of projects like in Argentina, or the optimal location like in Mexico, is increasing the use of price correction factors to establish the merit of order in the selection of tenders. Multi-criteria selection systems are more complex to implement and should be very well defined in advance to mitigate the perception of not being transparent.

“Pay as bid” is recommended. Establishing the final price

They are needed to avoid unexpected costs. Ceiling prices Ceiling prices have two issues: their calculation and if they should be disclosed. There is currently sufficient reliable information on renewables costs to calculate the ceiling price sufficiently accurate. In any case, it is always possible to implement an initial phase with a descending auction to "discover" the price (Brazil). With regard to its disclosure it is more convenient not to publish ceiling prices.

All case studies reveal the need for the use of financial guarantees Guarantees to avoid underbidding, financial guarantees have been the main instrument used on this regard. Bid bond, to guarantee the signature of the contract, and completion bond, to secure the construction of the project in time, are a must, and when they are low they have a clear effect in the number of projects cancelled or with considerable delays.

Design elements Description

First of all, they have to be very clear so that the bidder can Penalties for non- evaluate that risk. compliance or delays Sanctions are often due to delays in entering into operation and generation shortfalls. With regard to delays in entering operation, penalties should consider the reasons of the delays. Sanctions are the main instrument in the PPA to avoid deviations on the contracted amount of energy. As best practice Brazil allows deviation from - 10 % to + 30 % banking these deviations to the next year. Economic fines apply for greater negative deviations.

Local content Local content clauses pursue maximizing social benefits, through requirements industrial development and job creation. Empirical studies on the application of a mandatory local content to renewable energy projects show that the economies of scale are reduced so the project costs and electricity prices in the whole sale markets are increased (OECD 2015).

In the case studies analysed, the Brazilian renewable energy sector employs directly and indirectly 918,000 people, including 41,000 the wind sector and 4,000 the PV sector. On the other hand, in Uruguay there is a widespread conviction that local content requirements have made projects more expensive. No local manufacturing capacity has been created for renewable equipment, although service provider companies have been created that currently offer their services abroad.

The decision to incorporate local content requirements, their level and the possible evolution in time, must be taken considering the maturity of the market and the local capacities (industrial, human, infrastructures, financial, etc.).

Besides the local content clauses, mandatory local content can be linked to other support mechanisms such as: preferential financing, Brazil (BNDES) and Argentina (RenovAR program) or tax incentives. Uruguay offers a prime in the price for projects with local content higher than the mandatory.

Finally, one of the major challenges that governments are facing, is the adaptation of their support mechanisms to rapidly changing conditions in the renewable energy sector. It is very important to continuously evaluate and adapt the auction design according to the results and the changing market conditions.

1. Introduction

1.1. Status of renewable energy in Latin America and the Caribbean

In 2015, the installed renewable electricity generation capacity in the LAC region was more than 200 GW, representing 55% of the total electricity generation. Renewable non- hydro electricity generation capacity exceeded 36 GW by 2015 (IRENA 2016). It is estimated that, at the present rate of economic and population growth, the region will need to add 239 GW of capacity during the period from 2009 to 2030. This increase in capacity requires investments of US$ 430 billion (Yepez-García, Johnson y Andrés 2010).

Although large hydroelectric plants are the main generation technology, the rapid take- off of non-conventional renewable energy (NCRE), mainly PV and wind power, is very relevant. The installed PV generation capacity in the LAC region, increased tenfold within just five years, climbing from 114 MW at the end of 2010 to 1,179MW in 20151 while the cost of electricity from solar PV has decreased by more than 50% since 2012. In August 2016, a solar PV project in Chile was awarded at 29.1 US$/MWh, establishing the historical minimum at that time. Wind power installed in the region grew from 2,008 MW to 12,220 MW between the end of 2010 and the end of 20151. In the LAC region, the levelized cost of electricity from wind power has decreased by around 20% since 2010 (IRENA 2016). In the frame of the auction held in Peru in February 2016, the most competitive wind project was awarded at 36.8 US$/MWh.

There is consensus that the renewable energy market, in particular wind and solar PV technologies, has entered a virtuous circle where cost reduction and market expansion are being fed back (IPCC 2011). This can be observed not only in the LAC region but worldwide.

As shown in the Figure 1, investments in renewable energy, for all energy uses and excluding large hydroelectric power plants, grew by more than 350% in the last ten years in the LAC region, reaching 16.4 billion US$ in 2015 (IRENA 2016). As far as technologies are concerned, wind energy, which represented only 10% of investments in 2005, represented 62% in 2015. Photovoltaics, practically non-existent until 2011, was the technology that attracted the second most investment, with a share of 24% of the total in 2015. Finally, investments in biomass for electricity generation went from 22% to 8% in the same period. (IRENA 2016).

1 http://resourceirena.irena.org/gateway/

Figure 1: Investments in renewable energy in LAC (excl. large hydropower). Source: IRENA, 2016.

The main international reports and studies confirm that the LAC region is in the focus of investors and will remain so in the coming years. The Climatescope 20152 report (Fomin, UKAid y BNEF 2015) analyzes the capacity of 55 developing countries to attract clean energy investments based on four parameters: (i) enabling regulatory frameworks; (ii) finances and investments; (iii) value chains and (iv) climate change related activities and policies. Eleven countries from the LAC region rank among the top 21: Brazil (2nd after China), Chile (3rd), Mexico (7th), Uruguay (8th), Honduras (14th), Costa Rica 15th), Peru (16th), Guatemala (18th), Colombia (19th), Argentina (20th) and Panama (21st).

Forty renewable energy markets are analyzed on a worldwide basis every six months since 2003 by the Ernst & Young consultancy to develop the Renewable Energy Country Attractiveness Index (RECAI)3. The index takes into account aspects such as: (i) macroeconomic parameters; (ii) imperatives or motivations of energy policy; (iii) the political and regulatory context of renewables; (iv) the energy market, (v) infrastructures and the financial sector; (vi) the potential of different technologies. The last RECAI from 2016 includes six countries from the LAC region: Chile (4th), Mexico (6th), Brazil (8th), Argentina (16th), Peru (24th) and Uruguay (34th). (EY 2016).

2 http://global-climatescope.org/es/ 3 http://www.ey.com/gl/en/industries/power---utilities/renewable-energy-country-attractiveness-index

1.2. Status and trends in electricity auctions from renewable energy in the Latin America and the Caribbean region

Under optimal market conditions, since bidders have to compete, the renewable energy auction mechanism achieves efficient results.

Auction systems have benefited from the international increase in renewable energy project developers as well as from the growing knowledge and experiences in designing policies for the promotion of renewable energy acquired by governments over the last decade and a half.

By 2015, up to 60 countries had made use of the auction mechanism to promote new generation of renewable sources (REN21 2015). Auctions are the most popular regulatory instrument for the deployment of renewable energy in Latin America. Twelve countries have experience in specific auctions for renewable energy (one or more renewable energy technologies), namely: Argentina, Brazil, Chile, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Peru and Uruguay (IRENA 2015). Table 1 summarizes the main auctions of renewable energy carried out in Latin America.

Table 1: Renewable auctions in LAC. Source: Own elaboration from (IRENA 2015).

Year Country Technology

2006 Uruguay Wind

2007 Brazil Biomass, hydroelectric

Uruguay Wind, biomass, hydroelectric

2008 Brazil Biomass

2009 Argentina Wind, solar, biomass, hydroelectric

Brazil Wind

Peru Wind, solar, biomass, hydroelectric

Uruguay Wind

2010 Brazil Wind, biomass, hydroelectric

Honduras Wind, biomass, hydroelectric

Peru Solar, biomass, hydroelectric

2011 Brazil Wind, biomass, hydroelectric

Year Country Technology

Guatemala Hydroelectric

Panama Wind

Peru Wind, solar, biomass, hydroelectric

Uruguay Wind

2012 Brazil Wind, biomass, hydroelectric

Guatemala Wind, solar, biomass, hydroelectric

Panama Hydroelectric

2013 Brazil Wind, solar, biomass, hydroelectric

El Salvador Solar, biomass, hydroelectric

Guatemala Wind, solar, biomass, hydroelectric

Panama Wind, hydroelectric

Peru Hydroelectric

Brazil Wind, solar, biomass, hydroelectric

El Salvador Wind, solar, biomass, hydroelectric

Guatemala Solar

Panama Solar, hydroelectric

2015 Brazil Wind, solar, biomass, hydroelectric

Guatemala Hydroelectric

2016 Argentina Wind, solar, biomass, hydroelectric

El Salvador Wind, solar

Mexico Wind, solar

Peru Wind, solar, biomass, hydroelectric

With regard to technology specific auctions renewable energy carried out in 2016 in the LAC region, Table 2 summarizes the capacity and the average prices awarded.

Table 2: Renewable auctions in LAC in 2016. Source: Own elaboration.

Date Country Technology MW US$/MWh

February Peru Wind 162.0 37.49

PV 184.5 47.98

SHP 79.7 46.48

Biogas 4.0 77.00

March Mexico Wind 480.0 43.90

PV 1700.0 40.50

September Argentina Wind 600.0 69.50

PV 300.0 76.20

Biomass 65.0 114.60

Biogas 25.0 177.80

SHP 20.0 114.50

October El Salvador Wind 70.0 98.78

PV 100.0 51.48

Most of the renewable energy auctions held in the LAC region have been technology- specific, although recently, and in large markets such as Brazil and Mexico, there have been increasingly auctions where different renewable energy technologies competed with each other.

Finally, it is important to highlight the growing number of renewable energy projects that are awarded with contracts in the frame of technologically neutral auctions, where renewable technologies compete on equal terms with fossil fuel based technologies. This has been the case in Belize, Brazil, Chile, Guatemala, Mexico and Panama. It is important to highlight this trend as it involves the adaptation of the auctions design for conventional energy technologies to the characteristics of renewable energy technologies. This report, however, focuses on auctions exclusively for renewable energy technologies.

The second chapter of this report presents an overview of the use of auctions in the LAC region, followed by a description of the auction types and the main elements for their design. The third chapter analyzes in-depth three case studies: Brazil, Panama, and Uruguay. Finally, chapter four identifies lessons learned and best practices for the design of renewable energy auctions.

2. Design elements for electricity auctions from renewable enegy sources

In 2007, renewables accounted for 19.5% of the new installed generation capacity globally. In the year 2015, 53% of the new installed capacity were renewable energy projects (FS-UNEP 2016). As discussed in the introduction, the expansion of these technologies has been possible thanks to the implementation of support mechanisms. The motivations of governments for the promotion of renewables include the transition to a more sustainable energy system, meeting greenhouse gas reduction targets, increasing energy security, job creation or local economic development (IPCC 2011).

The support mechanisms put in place by governments are aimed at providing security for investments. In this sense, to provide a power purchase agreement with a fixed price has proven to be more efficient and effective support (IPCC 2011). There is an increasing use of actions to establish the purchase price against the use of administratively set feed- in tariffs.

With the increasing experience in the design of auctions of renewable energies they become increasingly sophisticated and can be adapted to achieve secondary objectives such as: local economic development and job creation; Integration of the variable generation in the grid; promotion of the diversity of actors; geographic distribution; reduction of greenhouse gases.

This chapter describes the main design elements for renewable energy auctions, as well as other aspects that frame the implementation of renewable energy auctions and that have an influence on the final result.

2.1. Renewable energy targets

One of the pillars for the large-scale deployment of renewable energy is the establishment of medium and long-term realistic but ambitious targets. Thus, auctions are usually implemented in the attainment of these targets. For example, in Brazil has the Ten- Year Energy Expansion Plan (PDEE) or, in the case of Argentina, the objective of the auctions is to comply with the Renewable Energy Plan (Renewable Energy Plan) which proposes a contribution of renewables to electricity generation of 8% by 2018 and 20% by 2025.

The ad-hoc design of the auctions to achieve long-term renewable energy objectives results in the improvement of confidence of project developers, greater competition and dynamic efficiencies. In addition, the design of auctions allows to reach other objectives in the medium and long term as well, such as economic diversification and industrialization.

2.2. Regularity and periodicity of auctions

Participation in auctions can result in significant transaction cost, including the cost of entering the market, and requires a minimum degree of development of the projects to prepare the offer. If the auctions are not part of a periodic process and are perceived as one-off measure, the risk increases for the project developers, reducing their participation, and subsequently increasing the final price (del Rio y Linares 2015).

In the case of Mexico, annual auctions are established. Although not formally established, Brazil has been running auctions regularly since 2009. Peru has executed four renewable energy auctions during the last five years. These countries have benefited from a higher dynamic efficiency due to, among other aspects, the learning curve of the companies and the increased number of companies participating in this competition.

2.3. Actors and responsibilities

The implementation of such auctions requires a variety of capacities from the administration such as: institutional, human, technical and financial capacities, which implies the participation of different institutions.

To facilitate implementation and ensure transparency, there must be legal clarity about the responsibilities of the actors involved.

2.4. Auction type

Depending on the process, the auctions can be classified into: sealed bid, dynamic and hybrid.

Sealed bid. In this auction process, bidders present their offers using sealed envelopes on a single occasion. All sealed bids are opened at the same time and thus information is known to everyone at the same time also.

Dynamic auction. Bidders know the offers of their competitors and subsequently can modify their own bids for so long as the auction is open. The two sub-types of the dynamic auction are:

• Ascending (English) auctions: Ascending (English) auctions: Valid opening bids have to be as high or higher as the determined reserve price. In the following, bidders submit bids with ascending prices outperforming the respective best offer. Bidders drop out until finally the contract is awarded to the one bidder offering the highest and final price;

• Descending clock (Dutch) auctions start with a certain price (ceiling) set by the auctioneer; bidders offer a quantity of the product; this quantity cannot be changed in the successive rounds. The auctioneer is lowering the price each round; bidders are withdrawing their bids. The auctioneer finishes the auction

when the quantity of product offered in the bids is equal to the desired one. Winning bidders are the ones who keep their bids until the end.

Hybrid auction. An auction can be designed in two phases, combining a sealed bid phase with a dynamic phase:

• Sealed bid + dynamic (Round Robin). The interested parties make their bids using sealed envelopes. The auctioneer informs the bidders on the best bid. After this communication, participants have one single opportunity to improve their bids or leave the auction.

• Descending clock + sealed bid. In the first phase, a dynamic downward auction is implemented where participants offer a quantity of the product starting with a ceiling price. This quantity cannot be changed during the auction. As the price goes down in successive rounds more and more bids are being withdrawn. Phase one ends when the desired supply equals the offered quantity to be contracted multiplied by a demand factor. If the demand factor is equal to, for example, 1.5, it means that the total quantity offered by the bids must be at least 50% higher than the quantity to be contracted. To avoid collusion both the quantity of energy to be contracted and the demand factor should not be known to the bidders. Only bidders that kept their bids until the end of the first phase can participate in the second phase, that consists of a sealed bid auction. The winning bids will be the ones that are necessary to contract the desired amount of energy from the lowest to highest bid price.

The type of renewable energy auctions used most in the LAC region is the sealed bid. The main exception is Brazil, which has implemented a hybrid system (descending clock combined with sealed bid).

Sealed bid auctions are simple for the institutions to implement and for the project developers to participate in. Contrary to dynamic auctions, where the price is the only criterion to select winning bids, sealed bid auctions allow to evaluate and to select proposals not only by price, but according to other criteria as well.

When the auctioneer has no information on the market price of the good to procure, setting the ceiling price is a great challenge in sealed bid auctions. In such cases, hybrid auctions (descending followed by sealed bid) have been applied. The price resulting from the first phase (descending clock) becomes the ceiling price for the second phase (sealed bid).

2.5. Object to auction

In the auction, companies compete to be awarded with a PPA or a capacity contract or both. Establishing the object to be auctioned involves several key decisions:

2.5.1. Volume of the auction

Brazil and Peru made the experience of high-priced auctions due to that the auction volumes set was too high which subsequently caused an insufficient level of competition (del Río, Haufe, y otros 2015). On the other hand, the auctioning of very small volumes in relation to the potential market, has resulted in underbidding, and therefore in a very low rate of completion of projects (del Río 2016).

2.5.2. Energy or capacity

Another aspect is to decide if the volume to be auctioned will be defined in energy or capacity. Although the result of the auction will be a PPA, the volume of the auction can be set to an amount of capacity. In this case, the risk of generation variability rests with the buyer. When volumes are set to an amount of energy, project developers need to forecast generation as precise as possible.

2.5.3. Power purchase agreement characteristics

Decisions regarding the duration of the PPA, the currency, price updating rules, or the off-taker are critical for the project developer to prepare a competitive offer. Financial close is more likely to be achieved with long-term contracts in US$ and indexed with inflation. All details of the PPA must be known in advance.

2.5.4. Other considerations

The object of the auction can only be established with a good knowledge of both, the electricity system and the national renewable energy market. The volume auctioned must be related to the medium and long term renewable energy targets. The deployment of electricity from renewables usually implies an increase of variable generation in the system. The object of the auction must be established considering the needs for backup capacity and transmission infrastructure to manage that variability.

In addition, the volume must be in correlation with the maturity of the renewable energy market, particularly in markets where there is a reduced number of companies active and renewable energy technologies are not available.

2.6. Source of funds

The cost of the renewable energy PPA can be transferred to the electricity tariff (to consumers) or be financed by the government, mainly through the national budget. Another and less common sources of funding are the implementation of a levy or grants from donors.

The credibility of the source of the funds is critical to obtain more competitive offers and to close the financing of the projects which results in higher rates of realized projects. In

case the funds are sourced from the national public budget, promoters will factor in the country risk.

Passing the cost to the final consumer, through the electricity tariff is the most commonly used option.

2.7. Eligible technologies

The auction may be designed for a single technology, for a group of technologies, or technologically neutral. In 2016, the auctions held in Peru were technology-specific, Mexico's first long-term auction was for renewable energy technologies and Chile held a technology neutral (conventional and renewables) auction.

Technology-specific auctions have the advantage of allowing diversification of supply (del Río, Haufe, y otros 2015). Technology-neutral auctions have the advantage of greater competition and hence reduced cost. There is evidence that in technology- neutral auctions in Brazil, the participation of wind projects has put pressure and reduced the bids of the combined cycles (Cunha, Barroso y Bezerra 2014).

2.8. Size of projects

In general, and due to economies of scale, larger power plants will result in lower cost. Thus, from an economic point of view, the size of the projects should not be limited.

In many cases, project size is limited by other factors, such as infrastructure, social and environmental impacts, etc. In Panama, for example, although the auction specifications itself do not define a maximum capacity for SHP, such plants usually do not exceed 10 MW, which is the limit for accessing tax exemptions.

In the case of Uruguay, limiting the size of wind power projects to 50 MW had the objective of promoting geographical dispersion, and thereby facilitating grid-integration and distributing socio-economic benefits.

On the other hand, large projects reduce the diversity of actors and local participation since, large projects can only be developed by larger companies or consortia.

2.9. Site specific or neutral

It is common to make a zoning exercise to prioritize the development of sites with availability of the resource, transmission capacity and social acceptance.

In some cases, the project is already linked to a specific site such as off-shore wind or municipal solid waste (MSW) projects.

In order to facilitate administrative procedures and to reduce the risks of the availability and variability of the resource potential, there have been cases of auctions tailored to specific project sites, as “Wind leasing” from Uruguay (see also case study) or the "Solar Scaling" program in Zambia.

Moreover, it is common to establish capacity limits by transmission nodes to avoid congestion and ensure the integration of the electricity into the system.

2.10. New vs. existing projects

In most cases, renewable energy auctions are designed to finance new projects. In some cases, however, it is possible that auctioned quantities of electricity can be supplied - partly or in full- through existing or upgrading (repowering) generation facilities.

2.11. Face-to-face vs on-line

On-line auctions eliminate the physical limitations of traditional auctions, such as geography, presence, time, space, and a small target audience. In addition, transaction costs decrease.

2.12. Prequalification

One of the suitable measures to ensure the integrity of offers has been the implementation of a prequalification phase. The project developers submit their expression of interest which contains sufficient proof of their technical and financial capacity. Subsequently only a short list of companies considered suitable is invited to participate in the auction.

2.13. Tender requirements

If there is no phase of prequalification of bidders, bids usually have to be submitted in two envelopes, one containing the economic offer and the other with information on the following:

• Administrative and legal aspects;

• Technical capacity. Typically, bidders require experience in similar projects and/ or specific qualification of the personnel who will be in charge of the project;

• Financial capacity;

• Project specifics: resources assessment, grid study, approval of the connection, environmental impact assessments, characteristics of the equipment, land lease contracts, etc.

The higher the requirements for technical reputation of the bidders are and the higher the degree of required project development is, the more pronounced will be the integrity of the offer. At the same time, stronger requirements will lower the competition in the auction.

2.14. Local content

The design of the auction may pursue other non-energy policy objectives such as maximizing local job creation, developing a new industry or enhancing the existing one. One of the usual measures to pursue these objectives is the establishment of a local content clause. Local content clauses establish a percentage of the equipment and services, to be purchased from domestic suppliers. This percentage may be a mandatory minimum, it may be voluntary and be taken into account to increase the final price of the contracted electricity.

Uruguay requires a minimum of 20% of local content, adding a premium to bids exceeding this percentage. In cases such as Argentina or Brazil, local content clauses apply when granting other support mechanisms for the project such as: subsidized financing or financial guarantees.

2.15. Information provided

All necessary information must be included in the bid documents. To discourage the participation of the “middle man”, a relatively high price is usually charged for acquiring the tender documents.

To facilitate the tender process, reduce administrative costs and facilitate greater participation, there is usually a web portal with further information on the current auction, previous auctions and administrative procedures. Examples of these are the websites of regulators in Brazil (ANEEL) and Peru (OSINERGMIN).

In addition, to facilitate site selection and measurement of the wind resource, Uruguay made available a resource mapping exercise.

To increase transparency and promote participation, it is common to advertise international auctions and to organize public information days.

2.16. Selecting the winning projects

The merit of order of the projects can be done:

• Only depending on the price;

• Applying a correction factor to the price. Applying such factor to establish the merit of order does not imply that the price of the PPA will differ from the price bided;

• Multi-criteria. Various criteria, like price, local content, etc. are applied. Each criteria has a weight and a scoring method is applied to determine the final score of each bid.

The application of a factor or a multi-criterion process allows pursuing other objectives besides the lowest cost. In Argentina, the use of a factor gives preference to an early entry into operation of projects. In Mexico, a factor gives advantages to projects located in transmission nodes that usually have higher generation costs.

For multi-criteria assessment, each criterion should have a clear scoring and weighting method to determine the final score. The criteria, their weighting and their scoring should be very clear to avoid subjective assessments. In any case, the perception of transparency tends to decrease with the application of multi-criteria methods (del Río, Haufe, y otros 2015).

Table 3 shows criteria and sub-criteria used for multicriteria assessment of tenders in renewable energy auctions.

Table 3: Multicriteria assessment in renewable auctions. Source: Own elaboration.

Criteria Sub-criteria

Price

Financial viability Percentage of required funding secured. Debt/ equity ratio. Participation of public capital. Technical Similar successful projects (anywhere). capacity Similar projects successfully implemented in the country / region. Staff’s experience. Industrial Direct investments in renewable energy industry. development Indirect investments in industry. Added value of industrial development. Sustainability of industrial development. Employment Direct employment generated by the project. creation Indirect employment induced by the project. Direct employment generated by industrial development. Indirect employment induced by industrial development. Social Percentage of capital invested by local companies. development Percentage of local qualified personnel recruited by the project.

Criteria Sub-criteria

Percentage of female staff recruited by the project.

Grid integration Technical management. Firm capacity. Storage. Reactive control. Participation in frequency regulation. Location (grid node). Transmission losses. Innovation Investment in research and development. Use of storage systems. Environmental Site rehabilitation plan. impact Integration of the installation into the landscape. Balance of greenhouse gas emissions (GHG). Application of ISO standards. Early Expected date of commissioning. commissioning Schedule of works execution. Degree of progress in the administrative procedures. Environmental impact assessment approved. Diversity of actors Centralized vs decentralized projects. Percentage of local capital.

2.17. Determination of the final price

There are several approaches to determine the final price received by bidders:

• Pay as bid. Winning bids receive the requested price. It is the method most commonly used.

• Uniform price. All selected offers receive the same price that usually is the one from the last offer accepted or from the first discarded.

• Application of a factor. In Uruguay, a price premium is awarded to those winning bids that presented higher percentages of local content than the mandatory minimums.

2.18. Ceiling prices

To limit the risk of very high auctioning cost, usually a maximum price (ceiling) is established. No offers exceeding that price are accepted.

The challenge is to determine the ceiling price. A very low and known ceiling price reduces the number of offers, which would be concentrated close to the ceiling price. With a low and not known ceiling price, few or no offers would qualify. High ceiling prices, however, discourage competition.

Regarding the publication of the ceiling price, non-publication increases competition, but in some cases conflicts with the public bidding rules that require transparency and hence publication of the ceiling price.

2.19. Minimum offer and invalidity clause.

Safeguard clauses are very common and allow for an auction to be cancelled if these clauses are violated.

In order to promote and ensure a minimum of competition, it is possible to establish a minimum number of times that the offer must exceed the demand to proceed with the award. Or establish a minimum number of necessary bids from different bidders.

2.20. Guarantees

The main criticism of the auction system is the low efficiency (cancellation and delays in project implementation) due, in part, to underbidding, the presentation of not genuine offers (very tight in price) with little room for maneuver in case of a setback. Financial guarantees reduce competition but increase effectiveness. They are necessary since they are the main instrument to promote the correct implementation and operation of the projects:

• Bid bond. It is executed in the event that a winning bidder does not sign the contract.

• Challenge bond. It is established to avoid delays due to the unjustified challenge of the result of the auction.

• Completion bond. It is executed in the case that the contract has been signed, but the project is not finalized or is delayed heavily.

• Performance bond. To ensure the compliance during the duration of the PPA.

• Dismantling bond. In Uruguay, part of the completion bond is retained throughout the lifetime of a project to ensure proper dismantling.

There is extensive experience in establishing these guarantees. They are usually a fixed amount per unit of energy or installed capacity or a percentage of the investment.

2.21. Penalties for non-compliance or delays

Sanctions are necessary to increase the integrity of the offers. Among the most common penalty mechanisms are:

• Enforcement of financial guarantees;

• Financial penalties;

• Temporary suspension of the right to participate in, or declaration of the exclusion from, public tenders;

• Possibility to terminate the contract if there are delays in commissioning;

• In case of deficit in the generation obligation to buy additional power;

• Reduction of the tariff.

2.22. Design options for achieving secondary objectives

Auctions are the appropriate mechanism to identify market prices. In addition to achieving the lower prices, auctions can be designed to achieve secondary objectives as well. Nevertheless, achievement of secondary objectives often results in an increase in purchase prices for electricity from renewable sources.

Table 4 summarizes possible design options for auctions pursuing secondary objectives.

Table 4: Design options for secondary objectives. Source: Own elaboration.

Industrial development and employment creation

Requirements for bids. Accept only offers that can demonstrate a minimum of local content and/ or recruitment of local qualified employees.

Criteria for the selection of winning projects. Rank the offers using a multi-criteria system in which the impact on the industrial development and the generation of employment is represented accordingly.

Integration of variable generation into the grid

Auctioned quantity. Limit capacity by electrical nodes.

Size of projects. Limit the maximum size of projects.

Requirements for projects. Technical requirements for the equipment to be installed. Administrative approval of the connection point.

Determination of the final price. Establish the final price to be paid with a fixed price plus a premium, based on the market price encouraging the correlation between supply and demand.

Criteria for the selection of winning projects. Rank the offers using a multi-criteria system in which the integration of variable electricity into the grid is valued, such as incorporating storage, location in favorable areas, etc.

Diversity of actors

Auctioned quantity. Retain a part of the quantity to be auctioned for a specific group of actors/ bidders, such as cooperative or community projects.

Prequalification. Prequalification criteria adapted to the type of bidder. Prequalification requires demonstration of the technical and financial capacity of the bidder, which leaves out local community projects and small project developers because they might not have comparable experience with large coorporations.

Criteria for the selection of winning projects. Rank the offers using a multi-criteria system favoring diversity of actors.

Criteria for the selection of winning projects. Limit the quantities (MW or MWh) that one single actor/ bidder can be awarded with.

Determination of the final price. After identification of the winning projects, offer the price of the most expensive bid accepted to projects from desired actors.

Financial guarantees. Appropriate level of financial guarantees for each group of actors/ bidders. High financial guarantees are one of the main obstacles for the participation of small project developers. Establishing the level according to the type of actor/ bidder favors diversity.

Geographical diversity

Auctioned quantity. Allocation of the total amount to be auctioned according to geographic quotas.

Location. Specify in advance the locations or areas where projects should be located and implemented.

Criteria for the selection of winning projects. Apply a correction factor based on the location to establish the merit of order.

Criteria for the selection of winning projects. Establish a multi-criteria valuation system using location as one criterion.

Determination of the final price. To increase the revenues for projects implemented in locations with less favorable resource conditions, a premium could be established and paid to bidders to top up the initially tendered price.

Reduction of greenhouse gas emissions

Requirements for bids. Establish a minimum emission reduction criterion for each project and request an emission reduction studies.

Criteria for the selection of winning projects. Establish a multi-criteria selection method including a criterion for the reduction of greenhouse gases.

In order to effectively meet secondary objectives included in the tendering conditions, it has to be an enabling environment and the right market conditions. For example, the obligation of bidders to recruit local staff to promote employment creation requires the existence of an education and training system that provides the market with the qualified personnel. Geographical diversity can only be achieved if there are minimal logistic and transmission infrastructures available to reach the location of the project.

3. Renewable Energy Auctions: Case Studies

3.1. Selection of case studies

Two of the selected cases are from South America: Brazil and Uruguay, the third one from Central America: Panama. These three countries have at least five years of experience in implementation of auctions as the main mechanism to promote the generation of electricity from renewable energy sources.

Table 5 presents a summary of the main socio-economic indicators for these three countries.

Table 5: Socio-economic indicators for Brazil, Panama and Uruguay. Source: Own elaboration from various sources.

Indicator Year Unit Brazil Panama Uruguay

Population 2015 Million 207.8 3.9 3.3 people Urban population 2015 % 86 65 94

Surface km2 8,515,770 78,569 176,215

GDP 2015 millions of US$ 1,775,000 52,130 53,443

GDP per capita 2015 US$ per 8,539 13,268 16,264 capita GDP Growth 2015 % -3.8 5.8 1.0

World Bank’s 2015 Rank 116/189 69/189 92/189 “Ease of doing business” ranking Human 2014 Score (Rank) 0.755 (75º) 0.780 (60º) 0.793 (52º) development index (HDI)

Table 6 presents a comparison of installed generation capacity in the three selected countries. All three have achieved already a high share of renewable energy generation, mainly hydropower and biomass. At the same time, they have promoted, using auctions, large-scale deployment of wind power in the last years and, though to a lesser extent, of photovoltaics.

Table 6: Installed capacity as of December 2015: Brazil, Panama and Uruguay. Source: Own elaboration from various sources.

Technology Brazil Panama Uruguay In MW and (share) in MW and (share) in MW and (share) Thermal fossil fuels 26,307 (19.1 %) 1,202 (37.0 %) 1,130 (29 %)

Natural gas 12,428 Petroleum 1,082 1,130 10,114 derivatives Coal 3,612 120

Remaining 153

Nuclear 1,990 (2.5 %) Renewables 112,561 (78.4 %) 2,032 (63 %) 2,722 (71 %)

Hydroelectric 91,650 1,726 1,562

Biomass 13,257 200

Wind 7,633 252 900

PV 21 54 43

Total 140,858 3,234 3,852

As mentioned in the introductory chapter, the LAC region is no stranger to the trend of using auctions to promote the deployment of renewables in the energy matrix. Throughout 2016, auctions from the region have attracted great attention of the main international energy companies: the fourth renewable energy auction in Peru, the first long-term auction in Mexico, and the first auction in the frame of the RenovAR program of Argentina.

The success in the large-scale development of renewable energy in a growing number of countries shows that it does not depend so much on a specific support instrument (e.g. auctions), but on the existence of an "enabling environment", which implies minimum institutional, regulatory, human resources, financial, and infrastructure capacities. This "enabling environment" is country-specific making direct comparison difficult.

One part of the "enabling environment" is the existence of additional support measures, which countries make available to winning projects, such as: investment grants, subsidized financing, financial guarantees, tax benefits, construction of connection infrastructures, etc. This kind of support is internalized in the offers and is reflected in the final price, making it even more difficult to compare auctions from different countries.

Aiming not only to describe the auctions in each country, but to understand the context in which they take place, each case study includes: a brief introduction of renewable energy trends in the country; regulatory framework of the power sector; description of

other support systems for renewable energy; result of the auctions; description of the auctions’ design and, finally, discussion of findings and lessons learned.

3.2. Brazil

3.2.1. Introduction

The energy policies implemented in Brazil have helped to accomplish remarkable progress in three fundamental pillars: i) universal access to a modern energy supply, ii) a low carbon energy matrix, and iii) security of supply.

In 2015, Brazil has practically achieved full access to energy. 42% of the primary energy consumption is from renewable sources. Brazil is a leading country in hydroelectric generation: for many years hydropower represented 100% of generation and in 2015 contributed 70% to the overall generation. In addition, since the 1970s, Brazil is a leading country in the production and consumption of liquid biofuels for transportation.

Regarding energy security, the country has important resources, fossil and renewable, in addition, since the beginning of the century Petrobras has been the most important oil company in Latin America. In the electricity system, a diversified generation capacity, the flexibility provided by the large hydroelectric plants, and the existence of interconnections with Argentina, Paraguay, Uruguay and Venezuela are factors increasing energy security.

The increase in energy demand, in particular electricity demand, the impact of droughts in hydropower output and the difficulty of building new hydropower plants have been drivers for the large-scale development of wind and solar energy in Brazil.

Since 2002, Brazil has implemented programs to support the generation of electricity from non-conventional renewable energy sources. These programs have been adapted to both, the development of these technologies and the needs of the system, and thus evolving from a regulated tariff support system (feed-in tariff), to auctions, both technology-specific and technologically neutral.

Brazil invested more than US$ 7.1 billion in renewable energy in 2015, and though this meant a decrease of 10% compared to 2014, Brazil was the seventh largest renewable energy investor in the world during that year and the largest investor from the LAC region (FS-UNEP 2016). In 2015, Brazil was the second biggest investor in hydropower plants, behind China, and the fourth in wind power behind China, the United States of America (USA) and Germany. In addition, Brazil was the second largest investor in biofuel production capacity for transportation behind the USA (REN21 2016).

The "Climatescope" indicator, which analyzes the regulatory framework and investment conditions for renewable energy in emerging markets, placed Brazil in a meritorious second place behind China (Fomin, UKAid y BNEF 2015).

Brazil is eighth in the ranking of countries by investment attractiveness for renewable energy. Although it is a country committed to developing renewable energy and has a mature and consolidated sector, in the short term the sector faces uncertainties associated with political changes and an economic crisis that has resulted in lowered forecasts of electricity consumption (EY 2016).

3.2.2. Regulatory framework

Until 1995, the Brazilian Electricity System (SEB) was a vertically integrated state monopoly. In order to increase the system flexibility and to reduce costs, the market was deregulated to create a free market starting in 1995. Following the energy crisis of 2001 and 2002, when the severe droughts that reduced hydroelectric production, put the electricity supply at risk, the government advanced a new set of further reforms to establish a new electricity system to ensure supply and sustainability. These reforms were implemented by means of the Law No. 10,847 and 10,848, dated March 15, 2004, and Decree No. 5163 of July 30, 2004.

The new model of the electricity sector aims to achieve the following three main objectives:

• Ensure security of power supply.

• Promote low tariffs.

• Promote full service coverage.

Regarding the commercialization of energy, two different environments were established for contracting electricity: The Regulated Contracting Environment (ACR), a regulated market in which the electricity distribution companies participate; and the Free Trade Environment (ACL), a free market in which auto-producers, commercialization companies, independent consumers, special consumers, independent producers, and importers and exporters participate. In 2012, the ACR accounted for 73% of the volume traded (IADB 2016).

Distribution companies buy electricity in the ACR by means of auctions which are conducted by the operator of the market (CCEE), selection criteria is “lowest price”, the cost is transferred to captive consumers through the regulated tariff.

In addition to the two mentioned environments, there is the short-term market, in which the adjustment between the contracted volumes and the measured electricity volumes is done.

Table 7 compiles the evolution of the Brazilian electrical market.

Table 7: Main features of SEB over time. Source: CCEE

Old model Free market model Current model (until 1995) (1995 to 2003) (since 2004) Financing Public resources. Public and private Public and private System resources. resources. Companies Vertically integrated. Unbundled: Unbundled: generation, generation, transmission, transmission, distribution and distribution, commercialization. marketing, import and export. Ownership of State. Openness with an Coexistence companies emphasis on between state and privatization. private companies. Market Regulated. Free. Coexistence between free and regulated. Competition in Monopoly, no Competition in Competition in the market competition. generation and generation and commercialization. commercialization. Tariffs Regulated in all Prices freely Two environments. sectors. negotiated for ACL: freely generation and negotiated prices for commercialization. generation and commercialization. ACR: regulated auction. Consumers Captive. Captive and free. Captive and free. Planning Imperative (GCPS). Indicative (CNPE). Indicative (EPE).

3.2.3. Support systems for renewable energy

The national targets for installed capacity of renewable energy for electricity production are determined in the Ten Year Energy Expansion Plan (PDEE), updated by the Energy Research Company (EPE) on regular basis. The latest PDEE, which was prepared in 2014 with the horizon of 2024, proposes an increase, over the period, in the installed capacity from renewables of 62,148 MW, which represents an increase of almost 56% in comparison to the renewable installed capacity in 2014. The expected increase of non- renewable is comparatively lower, 11,421 MW, mainly gas fueled combined cycle power plants.

Auctions are used to contract new power generation. It should be noted that, prior to the introduction of the auctioning system, Brazil implemented, since 2002, the Incentive Program for Alternative Energy Sources (PROINFA), which was based on an administratively determined and regulated tariff (feed-in tariff). With the PROINFA program, 119 projects with an installed capacity of 2,649 MW were implemented. This included 964 MW in wind farms, 1,152 MW in small hydroelectric plants and 533 MW in biomass plants.

In addition to the auctions and PROINFA, other support mechanisms for the promotion of renewable energy have been used as well:

• Preferential financing for renewable energy projects by the Brazilian Development Bank (BNDES). The BNDES finances the investment in renewable energy providing funding, in the case of wind power, up to 70% of the investment, and up to 80% in the case of PV technology. Loans are granted at a subsidized interest rate for projects that meet specific local content requirements.

The local content requirement varies depending on the technology. For example, in the case of wind projects the requirements for local content increased over time. Initially 40% of the components should be purchased from Brazilian suppliers, reaching 60% in 2012. Currently, developers of wind projects must comply with at least three of the following four criteria (IRENA, CEM 2015):

➢ Towers manufactured in Brazil, with at least 70% of steel or cement (by weight) produced in Brazil;

➢ Blades produced in Brazil;

➢ Nacelles mounted at a local installation in Brazil;

➢ Hub assembled in Brazil, using domestic cast iron;

For PV projects, there is a scale of interest rates and maximum levels of funding depending on the amount of local content that is included in a project, as well as, on the efficiency of the modules. The system classifies the project components as "minimum", "optional" and "premium". Projects that meet the minimum local content can receive loans for up to 65% of the total cost of the equipment. Those

that include "optional" and "premium" items can receive up to 80% of total costs (Förster y Amazo 2016).

• Energy Development Fund (Conta de Desenvolvimento Energético, CDE), created by Law 10.438 in 2002 to finance PROINFA projects and other renewable energy projects. It is financed through a tax on electricity prices.

• National Program for Universal Access and Use of Electricity (Luz para Todos), established by Decree 4.873 in 2003 in order to improve rural electrification by expansion of the grid, distributed generation systems in isolated grids or individual installations, powered by renewable electricity generation and hybrid systems. The Program is financed by the concessionaires, transmission and distribution companies.

• Discount on access fees of at least 50 % for hydroelectric, solar, wind and biomass projects of up to 30 MW (by Law 9.427 of 1996, Law 9.648 of 1998, Law of 10.438 of 2002, Law 10.762 of 2003, Law 11,488 of 2007 and Law 13,097 of 2015).

• Tax incentives for renewable energy included in a general regime for the development of infrastructure, exemption from import taxes for renewable equipment (wind turbines and PV panels, if there are no similar ones from local production) and exemption of the tax on Circulation of Goods and Services (ICMS) for wind and solar.

• Net metering for small producers (less than 1 MW) of solar, wind, hydroelectric and biomass, established by Resolution 482 of 2012. The production surplus would be credited for a maximum of 36 months against future consumption.

3.2.4. Brazilian auction system

The current institutional model of the Brazilian electricity sector created in 2004 and governed by Law No. 10,848 and by Decree No. 5,163 from 2004, establishes that the energy distribution companies of the National Interconnected System (SIN) must guarantee the supply for its entire market contracting it through auctions (MME, 2014). Subsequently Decree No. 6048 from 2007 modifies the Decree No. 5,163 from 2004 introducing the possibility of conducting exclusive auctions from alternative sources.

The original motivation for the application of an auction system was to reveal prices. Which means to discover the real cost of renewable technologies and increase the efficiency in the contracting (Barroso, L.; 2012).

3.2.5. Types of electric power auctions in Brazil

Auctions in Brazil apply to the contracting of all electricity supplied by distributors in the Regulated Tariff Market (ACR). The main types of electricity generation auctions in Brazil are:

• New energy. It aims to meet the future increase in demand contracting power from projects that have not yet entered commercial operation. This auction consists of two different types: A-5, project will start operation five years after the auction, and A-3, supply will start three years after the auction.

• Existing energy (A-1). To replace contracts that expire, with power from existing plants whose investments have already been amortized and therefore have a lower cost. The delivery of energy is from the beginning of the following year.

• Reserve. The contracting of reserve energy was created to increase the security of electricity supply in the SIN, with electricity generated and especially purchased for this purpose, either from new or existing projects.

• Adjustment. Distribution companies can contract up to 1% of its market. Adjustment auctions are to bridge the gap between the forecast from the distribution companies and the real consumption. These are generally short-term contracts (3 months to 2 years).

• From alternative sources. It aims to encourage the diversification of the energy matrix, introducing new projects from renewable energy sources such as wind, solar and biomass.

• Structural Projects. For the purchase of electricity from generation projects indicated by resolution of the National Energy Policy Council (CNPE) and approved by the President of the Republic. These are strategic projects of public interest, usually large hydroelectric plants, which ensure affordable tariffs and increase reliability of the system, and guarantee to meet long-term demand.

In addition to specific auctions of alternative sources, renewable energy projects have usually been awarded in auctions for new energy, typically large hydropower, biomass and wind projects in auctions of subtype A-5 and wind, biomass and small hydropower projects in auctions of subtype A-3. Table 8 presents the results obtained by renewables in new energy auctions.

Table 8: Renewables in new energy auctions in Brazil. Source: Own elaboration from ANEEL4.

Auction Total Wind Biomass SHP Hydro Fossil (MW) (MW) (%) (MW) (MW) (MW) (MW) (%) 2006 A-3 762.5 162 2 598 78% A-5 1,548.3 262 622 664 43% 2007 A-5 1,479.4 1,479 100% A-3 1,735.9 1,736 100% 2008 A-3 1,935.4 1,935 100% A-5 5,566.5 144 350 5,073 91% 2010 A-5 808.9 80 729 2011 A-3 2,744.6 861 31% 198 450 1,029 37% A-5 1,210.7 81% 977 100 135 2012 A-5 574.3 282 49% 292 2013 A-5 1,265.5 647 62 557 A-3 867.6 868 100% A-5 3,507.4 2,338 67% 162 308 700 2014 A-3 968.6 762 79% 206 A-5 4,979.4 926 19% 611 44 3,399 68% 2015 A-5 1,973.4 111 164 182 1,516 77% A-3 669.5 539 80% 37 66 28 4% 2016 A-5 528.9 198 263 62 6 1%

3.2.6. Description of the auction system

The main objective of the new energy and alternative sources auctions types is to guarantee future power supply according to forecasts of the evolution of demand at a

4 http://www.aneel.gov.br/arquivos/Excel/CEL_Resultado_Leiloes_Geracao_2005a2014_31-jul- 14.xlsx. Retrieved on December 5th, 2016.

competitive price. The volume of energy auctioned is estimated based on the long-term sales forecasts of the distributors.

Although there is no established timetable, new energy auctions are usually held twice a year, while alternative-source auctions are scheduled at the discretion of the government.

The Ministry of Mines and Energy (MME) convenes the auction by decree and holds the National Electric Energy Agency (ANEEL) accountable for its compliance with the guidelines laid out in the decree. ANEEL delegates the implementation of the auction to market operator CCEE. In addition, EPE is responsible for the technical pre-qualification of the bids before the auctions. Both ANEEL and CCEE keep their websites updated with all the documents generated during the auction cycle. The administrative costs incurred by CCEE during the auction are passed on proportionally to the winning projects.

The auctions are of a hybrid type. In the first phase, a dynamic downward auction is implemented: participants bid for annual amount of energy starting at the ceiling price. This amount cannot be changed during the auction. As the price is lowered in successive rounds bids are being withdrawn. Phase one ends when the supply equals the amount of energy offered by remaining bids multiplied by a demand factor. If the demand factor is equal to 1.5, it means that the total volume of the bids must be at least 50% higher than the volume to be contracted. In order for there to be no collusion, both the amount of energy to be contracted and the demand factor should not be known.

Only bidders that kept their bids until the end of the first phase can participate in the second phase, that consists of a sealed bid auction. The winning bids will be the ones that are necessary to contract the desired amount of energy starting from the lowest bid price.

To reduce administrative procedures, projects that were not awarded in a call, can be submitted in future auctions without having to send all the documentation again unless the information provided has changed.

Auctions can be technologically neutral with either both renewable and conventional energy technologies or only the renewable energy technologies competing; or specific energy technologies competing.

In general, there are no upper limits in terms of the size of the project can have. However, solar PV projects with an installed capacity of less than 5 MW and mini-hydro technology projects of less than 1 MW are not allowed. If imported, wind projects must install wind turbines with a nominal capacity of at least 2.5 MW.

As a precondition to participate in the auction a bid bond of at least 1% of the estimated investment cost is required. Afterwards, the winning bids must present a completion bond of 5% of the estimated cost of the investment.

As a result of the auction a contract for the supply of electricity is signed with a distribution company on the basis of the amount of energy and the price offered in the bid (pay as

bid). The contract is for a period between 15 and 30 years. The contracts for wind energy and solar PV technologies usually are for 20 years. The contract is in local currency, the Brazilian Real. The price is updated annually using the evolution of the Brazilian consumer price index (CPI) as a reference. The cost of the contracts is passed to the regulated consumers by the distributors.

Until 2013, wind projects participating in the auctions were allowed to offer no more than the amount of annual energy that has a 50% probability of occurring (P50). The financial risk of deviations was high, since during operation the actual production was compared monthly with that stipulated in the contract. In case of a deficit, producer pays a penalty, and in case of a surplus, the excess could be sold in the free contracting market. There was no possibility for reducing the risk of deviations by grouping projects.

Since 2013, wind projects can only offer that annual amount of energy that has a 90% probability of occurrence (P90) in order to minimize the effects of variability.

In addition, further compensation mechanism is applied: If the deviation from the contractually agreed energy production for one year is either up to 10% less or up to 30% higher, this deviation is carried over to the following year. If the annual generation:

• is less than 90%, ten percent is carried over to the following year with a negative balance and the difference between the energy produced and 90% of the energy contracted it is paid, by the producer, at a price 15% higher than the price stipulated in the contract.

• exceeds 130% of the contracted energy, 30% is transferred with a positive balance to the following year and the rest it is paid, by the distribution company, at a price equal to 70% of the price stipulated in the contract. at the end of the fourth year if:

• The energy production is in a deficit higher than 10%, the difference between the energy produced and 90% it is paid, by the producer, at a price 15% higher than the price stipulated in the contract. The remaining 10% must be paid, by the producer, at a price 6% higher than in the PPA unless this power is compensated with excess production from another project.

• If the actual generation his higher than 130% of the contracted production, the production exceeding 130% is paid at a price equal to 70% of the price stipulated in the contract. The remaining 30% can be charged at the contractually agreed price, or be transferred to a project with a deficit in energy production, or transferred as a positive balance to the following year.

To understand the Brazilian experience with renewable energy auctions, it is necessary to mention the changes in the procurement of connection infrastructures. Until 2013 it was not necessary for the operator to have access to the grid. Once the auction ended, depending on the projects awarded, the government estimated the transmission infrastructure needs and the cost for each project, and subsequently tendered for these

infrastructures. The lack of coordination between the development of transmission and generation has caused a generalized delay in the implementation of projects. To alleviate delays resulting from a lack of infrastructure, since 2013, developers must have access to the grid and take care of all necessary works in this regard. The cost of this investment has to be recovered from the sale of energy (Cunha, Barroso y Bezerra 2014).

As delays are the rule rather than exception, there is an incentive for an early entry into operation. Sellers can anticipate the commercial operation of their projects and sell the energy produced at the price stipulated in the PPA.

Table 9 presents a summary of the current design of auctions for new generation projects in Brazil.

Table 9: Design of renewable energy auctions in Brazil (for new energy). Source: Own elaboration.

Design elements Description RE Objective Long term objectives in the Ten-Year Energy Expansion Plan (PDEE).

Regularity/ There is no fixed timetable, but since 2009, new capacity periodicity auctions have been conducted every year.

Responsible In the frame of the guidelines of the Ministry of Mines and Energy 5 authority (MME), ANEEL is responsible for the execution of the auctions. ANEEL delegates the implementation of the auction to the CCEE.

Object to auction PPA for a period of between 15 and 30 years concluded with a distribution company. The PPA for wind and solar PV technologies usually have a duration of 20 years. Contracts are in local currency. The price is updated annually taking as a reference the evolution of the CPI in Brazil. Source of funds Electricity tariff. Technology- Both. specific vs neutral Site specific vs Neutral. neutral Size of the projects. Solar PV, minimum capacity of 5 MW.

Mini-hydropower, minimum capacity 1 MW.

5 Annex I provides a description of the institutional framework of the electricity system in Brazil.

Design elements Description Nominal capacity of imported wind turbines of at least 2.5 MW.

Maximum energy production that the wind farms can bid in an auction is (P90). Types of auction. Hybrid: • A first phase, descending clock auction. • A second phase sealed bid. In presence or on- The auction is done online. line The administrative procedures can be done both ways, physically and on-line. Prequalification General administrative documents: legal, fiscal, economic- criteria financial, technical (qualifications of the responsible technician and project schedule).

No technical reputation is required. Information Ceiling price. provided Transmission capacity.

Projects registered to participate in the auction. Requirements on Technical feasibility studies. bidders Environmental impact study and environmental license depending on the development stage of the project.

A grid access approval issued by the system operator.

Resource assessment (annual energy output and standard uncertainty) conducted by an independent institution.

Selection criteria of The contracts are awarded one after the other in ascending winning bids order starting with the offer with the lowest price until the total volume auctioned is awarded.

Establishing the final Pay as bid in Brazilian Real/ MWh. price Ceiling prices Yes. Published in the tender specifications. Ceiling price is the starting point of the first phase of the auction which is a dynamic descending auction.

Minimum number of Not explicitly. General rule: Abort the auction if it is in the public bidders interest. No entitlement to claim reimbursement or compensation to any third party.

Guarantees Financial:

• A bid bond of at least 1% of the estimated investment cost. • Completion bond, 5% of the estimated investment cost.

Design elements Description Penalties for non- In addition to the execution of the financial guarantees, breach compliance or of any obligation stipulated in the tender specifications could delays lead to: warning, economic penalty, temporary suspension of the right to participate in ANEEL auctions for the duration of two years, refusal of participation in public tenders.

Possibility to terminate the contract if there are delays in entering into operation.

If the energy production deficit is higher than 10% compared to the contracted production level, 10% are carried over as a negative balance to the following year. For the difference between 90% of the contracted energy production and the actual energy production, an amount consisting of the contractually agreed price for the respective production level and a penalty surcharge of 15% on that price is payable. Incentives If there is an annual excess production of more than 30% of the contracted energy production, 30% are carried over to the following year as a positive balance. The price payable for the production exceeding these 30% is calculated on the basis of the contractual price for the respective production - reduced by 30%.

For early entry into operation, electricity will be pay in the same terms of the PPA. Local content rules No. But there are local content rules to access privileged finance.

3.2.7. Results of renewable energy auctions in Brazil

Wind auctions

Since 2009 to the present day, more than 15 GW or a total of 600 wind energy projects have been contracted in 16 auctions. Table 10 collects information on the total capacity, number of projects and average tariff (in local currency and nominal prices) of the wind projects in each of the auctions.

Table 10: Auction results for wind projects in Brazil. Source: Own elaboration based on ANEEL.

Contracted Number Average price of Average price of Auction Date capacity of contracts (Br R/ contracts (US$ / type (MW) projects MWh) MWh) RP December-09 1,806 71 148 84.6 RP August-10 528 17 118 67.4 FA August-10 1,520 53 131 74.8 RP August-11 1,068 43 100 62.9 A-3 August-11 861 35 100 53.7 A-5 December-11 977 39 105 56.4 A-5 December-12 282 10 88 41.9 RP August-13 1,505 66 111 48.2 A-3 November-13 868 39 124 54.9 A-5 December-13 2,338 97 119 52.6 A-3 June-14 762 31 142 63.7 RP October-14 551 21 126 52.5 A-5 November-14 926 36 136 52.3 FA April-15 90 3 177 56.7 A-3 August-15 539 19 181 52.0 RP November-15 528 20 203 53.3

TOTAL 15,149 600 RP - Reserve power. FA - Alternative sources. A-3 - Energy from new projects to start operation in three years. A-5 - Energy from new projects to start operations in five years.

Compared to the feed-in tariff from the PROINFA program, prices fell by almost 45% in the first auction in 2009 and then further decreased by 40% during the 2009-2012 period.

Among the reasons for this decrease are:

• The transition from feed-in tariffs to an auction system that allows to capitalize the benefits of the reduction of costs of renewable technologies;

• The establishment of a competitive system that encourages renewable energy development in the most suitable locations (Elizondo, y otros 2014);

• The crisis of the European renewables sector led to a greater degree of globalization of companies from the sector, increasing their presence and competitiveness among project developers in Brazil (Bayer 2016). Considering the expectations of market growth, some project developers made additional efforts to position themselves in the market (Donoso 2012);

• The economic slump in the international wind turbine markets during those years led to a significant offer surplus, and caused manufacturers to adjust their margins significantly to obtain the desired contracts (Donoso 2012). In fact, many of the winning consortiums had equipment manufacturers as shareholders (Porrua, y otros 2010);

• The revaluation of the Brazilian Real (Porrua, y otros 2010);

• Underbidding (IRENA 2013), among other reasons for insufficient cover for the risk of penalties related with deficit in the generation (Porrua, y otros 2010).

From 2013 onwards, a steady increase in average price of contracts can be observed which is mainly due to:

• The impact in the generation cost of the transmission infrastructure;

• Increased local content requirements to access BNDES financing;

• The depreciation of the Brazilian currency. Between August 2013 and August 2015, the Brazilian Real lost 33% of its value compared to the US$ (Bayer 2016).

In any case, these price trends should be analyzed with caution, Figure 2 presents a comparison of (i) nominal prices, (ii) prices corrected with inflation and (iii) prices in US$. Between 2009 and 2015, prices in US$ decreased by 49%. Prices corrected by inflation were 13% lower. Nominal prices grew 22% (Bayer 2016).

Figure 2: Prices and capacities of wind auctions. Source: (Bayer 2016).

With regard to price levels achieved with auctions, it is very important to mention that in Brazil, the prices for wind power have been many times, more competitive than the prices offered by the combined cycle gas turbine. In addition, the increasing competition of wind energy with conventional power is one of the reasons for the downward adjustment of electricity prices in Brazil (Cunha, Barroso y Bezerra 2014).

Another consideration is the high rate of delays in project implementation. Only 14% of the 9,141 MW of wind power projects that should have been in operation before March 2016 met the start date. 29% went into commercial operation with a one year delay. In two of the auctions none of the projects went into operation on time (Bayer 2016).

In 70% of cases, the delays have their origin in the required construction of transmission lines and sub-stations to connect the wind farm to the grid. Both, the winners of the public tenders for transmission infrastructure and the wind project developers faced many difficulties in obtaining environmental authorizations (Elizondo, y otros 2014).

Other minor reasons for the delays of the wind projects were: bottlenecks in the supply of equipment, the bankruptcy of the wind turbine generator IMPSA, the delay in the approval of financing by the BNDES and mismanagement of projects (Bayer 2016).

Photovoltaic auctions

Table 11 shows the results of the auctions in which solar PV projects were awarded. At the end of 2016, 93 projects with a total installed capacity of 2.6 GW have been awarded in three tenders. Before these PV specific auctions, in two new capacity auctions (A-3 and A-5) at the end of 2013, PV projects amounting respectively 800 and 2,000 MW of capacity, participated in the auctions, but none were awarded.

Table 11: Auction results for solar photovoltaic projects in Brazil. Source: Own elaboration based on CCE.

Contracted Average price Number of Auction Type Date capacity of contracts (Br projects (MW) R/ MWh)

RP October-14 889.6 31 215.5 RP August-15 833.0 30 301.6 RP November-15 899.3 32 297.3 TOTAL 2,621.9 93

Prices of the auction held in August 2015 were 40% higher than in the previous auction from October 2014. The devaluation of the Brazilian Real, the lack of services and equipment supplies and the import taxes on equipment (Diaz Lopez 2015) are found among the main reasons for this increase.

From the 889.6 MW awarded in 2014, only 210 MW are expected to be developed (Spatuzza 2016). The strong devaluation of the Brazilian Real is the main argument from the winners of the auction for not continuing to develop the projects. Recently the Brazilian government has accepted the cancellation of these contracts and imposed a fine equaling twice the financial guarantee. However, the government will allow the participation of these projects in future auctions.

3.2.8. Discussion and lessons learned.

Brazil maintains clear signs of a long-term commitment to renewable energy, which helps to maintain a high level of attractiveness to investors. There is a public energy planning document, the PDEE, which gives clear indications to project developers about the planned development for the different generation technologies in the country. Although there is no fixed calendar, since 2010, exclusive auctions of alternative sources have been conducted.

In general, it can be said that the institutions of the Brazilian energy sector are empowered and independent. Its obligations in the implementation of the auctions are clearly defined and they have sufficient human, technical and financial resources to carry out the activities entrusted to them. In fact, not to impose a financial burden to them, the costs incurred in the implementation of the auction are passed on proportionately to the projects awarded.

Brazil is the clear example that the successful development of large-scale renewable energy does not depend on a specific support instrument but, on the combination of several instruments and their tailored design. The large-scale deployment of renewables and the development of a local industry is due to the combination of different support schemes mainly, long term PPA and subsidized financing.

One of the major challenges faced by governments is the adaptation of the support mechanisms to changing conditions that requires a continuous revision of their design. Following the first experience of biomass project auctions in 2008, in 2009, Brazil switched from a feed-in tariff scheme to auctions. In 2013, the design was adapted based on the lessons learnt. Changes were made to address the following challenges:

• Cost reduction. The move from feed-in tariff to auctions allowed to capitalize the benefits of the continuous reduction of costs of the renewable technologies. The strategy of progressively move from technology specific, to alternative energy technologies, to technology neutral auctions, promotes both, static and dynamic efficiencies.

• Grid access. Improved coordination between the development of transmission and generation infrastructure. Increased competition for available capacity.

• Reduction of risks due to deviations from expected generation. From 2013: (i) the adjustment period for the imbalance, between contracted and generated

power, moved from monthly to annual; (ii) within limits (-10%, +30%), deviations were allowed to pass through the following year; (iii) contracts were based on more conservative generation forecast (P90) versus (P50) for wind projects.

Beyond the external factors, analyzed in this chapter, that Brazil have benefited for the development of wind energy, it is clear that, thanks to the regulatory framework Brazil was able to attract many foreign companies and to create local companies resulting in a very competitive market:

• When it comes to attracting companies, one of the most valued factors is the signing of long-term PPAs with annual updating of the price, based on the consumer price index. These contracts are possible due to the legal obligation of the distribution company (off-taker) to pass this cost to the consumer.

• The first phase of the hybrid auction, downward dynamics, has proven to be effective in uncovering prices. The second phase, sealed bid, ensures competition between bidders. In these hybrid auctions, it has been more important to secure a lot of competition than to set low initial ceiling prices, to award bids at low prices. The experience with low ceiling prices close to the marginal cost of the projects has been a reduction of competition with many developers abandoning immediately and others simply offering the ceiling price (Elizondo, y otros 2014).

Despite the adaptation of the design of the auctions the delays in the implementation of the projects are the norm, mainly due to problems for connecting to the grid and with administrative procedures. In order to participate in the auction, environmental license and access to the grid are needed, afterwards in order to build the project installation license and the connection permit are needed, these procedures can take more than two years.

The non-inclusion of technical reputation requirements for companies increases competition and participation of local firms, but is leading in some cases to inadequate project management and the difficulty of closing funding for lacking proven financial track record.

With PPAs in local currency, the development of the market is clearly influenced by changes in the value of the Brazilian real. In an initial stage, the development of wind projects benefited from the appreciation of the Real, in recent times the effect is the opposite, and the depreciation of the Real is a problem for the development of projects due to the Increase in the cost of imported equipment and services. In the case of wind power the impact has been lower since at present most equipment is bought from local manufacturers in local currency, but in PV has prevented the development of many projects awarded with a PPA.

Obtaining privileged financing from BNDES has become a key element in order to present a competitive offer. Although the use of BNDES privileged funds lowers financing cost, an element of risk in this respect is whether the BNDES will have sufficient financial capacity

for all the planned wind and PV projects or, if inflation increases in the country, the BNDES will end up restricting the credit. In addition, some delays in the start-up have been due to the insufficient speed of BNDES in granting the financing (Donoso 2012). But undoubtedly, the most controversial element of BNDES financing is the mandatory local content conditions that lead to an increase in the cost of the project (OECD 2015).

In summary, Brazil has managed to materialize the high attractiveness of being a large, expanding market with important energy resources to supply the demand for electricity in a diversified and low carbon way.

In recent years, Brazil has continued the expansion of the use of hydropower and biomass resources, as well as introduced wind, and to a lesser extent PV, on a large scale and with competitive prices thanks to auction systems.

Tailoring the design of the auctions, based in lessons learnt, to adapt to the changing conditions in the market, has: (i) made possible to capitalize the benefits of the reduction of the costs of renewable technologies; (ii) reduced grid connection problems and; (iii) minimized the risk, for both, project developers and the system, of the variability of the generation.

In any case, remains the challenge to reduce the delays in the implementation of the projects and the doubt on the desirability of maintaining, in the medium and long term, the access to subsidized financing linked to mandatory local content requirements.

3.3. Panama

3.3.1. Introduction

A broad outline of the Panamanian electricity sector, defines it as follows: (i) a generation capacity of 3,235 MW, made up of thermal plants, large hydro, run of river and, recently, wind and photovoltaics farms; (ii) A transmission activity, carried out by the Electric Transmission Company S.A. (ETESA) of which 100% of the shares belongs to the State; And (iii) three distribution companies, organized in concession areas that do not compete with each other.

In recent years, due to the boom of the Panamanian economy the energy needs have increased considerably. A 6% growth rate of electricity demand in the long term (period of 15 years) is expected. This means, to double the generating capacity every 10 years.

In Panama, with the entry into force of the Law 6 of 1997, a liberalized electricity sector was established; totally open to private participation, and with a clear regulatory framework.

The distribution companies are required to have contracted different percentages of their power and energy needs in the short, medium and long term. ETESA prepares the tender documents and implements the auctions. The contracts are signed between the winners of a tender and the distribution companies (off-taker).

The National Energy Secretariat (SEN), the governing body for energy policies, has sought to foster the development of renewable and clean energy sources through technology specific auctions for wind, PV and hydropower.

The support to renewable energy is not limited to signing PPAs with guaranteed prices, other incentives are: fiscal measures, privileged access to networks, net metering scheme, among others.

In 2016 Panama had the largest wind farm in Central America with 270 MW installed capacity, several PV farms exceeding 90 MW of installed capacity, and a lot of run of river hydropower plants. All of this, makes the contribution of renewable energy, up to 65% of the country's electricity.

The National Energy Plan 2015-2050 (PNE), drafted in consultation with Panamanian civil society, presents an energy scenario where renewable sources, solar and wind, as well as energy efficiency and distributed generation, should be developed to the greatest possible extent. Likewise, it proposes a substitution of the conventional thermal power plants for natural gas power plants that will function as a backup.

The "Climatescope" indicator, which analyses the regulatory framework and investment conditions for renewable energies, ranked Panama in the eleventh place in 2015 among Latin American and Caribbean countries (LAC) (Fomin et al., 2015). The same source

estimates an investment of 868 million dollars in renewable energy in the country in 2014 and a cumulative investment in the period 2009-2014 of 1.95 billion dollars.

3.3.2. Regulatory framework

The government of Panama developed the "2015-2050 National Energy Plan, Panama: The Future We Want" in 2015, through a participatory consultation scheme involving many different actors from civil society, academia, business associations, and representatives from first nations, among others. This Energy Plan was approved by Decree No. 34 of March 29, 2016 and published in the official gazette No. 28003 of April 5, 2016.

One of the main axes of this plan is the diversification of the energy matrix with the further development of clean and renewable sources. Certainly, the Plan is based on the "need for the energy system to use less fossil fuels. This means making more use of renewable energy to meet the challenges of climate change and local pollution".

Law 6 of 1997, "Establishing the Regulatory and Institutional Framework for the Provision of Public Electricity Services", regulated by Decree 22 of 1998, establishes the regime for the generation, transmission, distribution and commercialization activities of the public electricity service, as well as other activities like the coordination of the transmission expansion plan, the integrated operation of the National Interconnected System.

Regarding to auctions, Law 6 of 1997, as amended by Law 57 of 2009, establishes that, to meet the requirements of the distribution companies, power purchases will be made by means of public bidding (auctions) as a method of acquisition, and ETESA will be the institution charged with this task.

The Law 43 of August 9, 2012, allows to conduct technology specific tenders. Technology specific tenders are called "special Statement of objections". The specifications of special Statement of objections are subject to the energy policy guidelines established by the SEN and are aimed at conducting auctions by type of technology with the intention of designing the national electricity matrix. The bidding documents of these auctions must also be approved by the regulator authority (ASEP).

In addition, Law 43 of 2012, includes a factor to privilege renewables in technology neutral auctions. If a renewable energy project is not selected offering a price 5% higher than the last fossil bid selected, the renewable energy project will be awarded with the contract.

3.3.3. Support systems for renewable energy

One of the main axes of the PNE 2015-2050 is the diversification of the energy matrix with the development of renewable and clean energy sources. Based on this, the Short Term Operational Plan (2015-2019), establishes a policy to promote renewable and clean sources, consolidating in a single regulatory framework all renewable sources, defining

clear rules and eliminating distortions in energy prices through the implementation of a tax on carbon content, so that renewable sources and natural gas compete in competitive processes against fossil energies. However, this tax is not implemented and still under discussion in the SEN.

In addition to technology specific auctions, there are other support mechanism for the development of renewable energy projects: fiscal incentives, exemptions from transmission and distribution fees; among others. Table 12, shows the support mechanism for renewables energy projects.

Another key aspect of the PEN 2015-2050 is the promotion of decentralized generation from renewable sources. Until November 2016 there were approximately 10 MW of self- generation with small, clean and renewable power plants. Net metering began in Panama since 2008 by resolution AN No. 2060-Elec of September 10, 2008, and was subsequently extended by resolution ANNo.3028-Elec of October 22, 2009, which established the procedure for the connection of small photovoltaic systems, no more than 10 kW. All of this was modified in AN Resolution No.5399-Elec of June 27, 2012, which established and approved the Procedure for the Connection of Private Power Plants from new, renewable and clean sources of up to 500 kW to the low voltage distribution grid and will be in force until December 31, 2017.

The method used for compensation establishes that in case of a net delivery of electricity to the network, payments for that energy will be equal to the average cost of electricity for the distribution companies. It also limits the amount of energy remunerated to a maximum of 25% of energy consumption.

Table 12: Support schemes for renewable energy in Panama. Source: Own elaboration.

Type of Description Source Size Reference Support (MW) Fiscal For private plants, exemption from import taxes for the equipment and spare parts Renewables < 0,5 Law 45 of 2004 required for the construction and operation of the plants. Exemption from import taxes for the equipment and spare parts required for the Renewables Any Law 45 of 2004 construction and operation of the plants. Exemption from the import tax, tariffs, taxes, contributions and levies, as well as Wind Any Law 44 of 2011 the tax on the transfer of material goods and services, to natural or legal persons who import equipment for wind generation with the purpose of selling them; As well as to equipment, machinery, materials, spare parts and other that are destined for the construction, operation and maintenance of the wind power plants. Exemption of the import tax and levies. Solar Any Law 37 of 2013 Exemption from the import tax, tariffs, rates, contributions and levies, for a period Biomass Any Law 44 of 2011 of 10 years, from the entry into commercial operation. Tax incentive of up to 25% of the direct cost of the project (based on equivalent Renewables < 10 Law 45 of 2004 CO2 emissions that are displaced), applicable to 100% of the income tax during the first 10 years of commercial operation. Tax incentive of up to 25% of the direct cost of the project (based on equivalent Renewables > 10 Law 45 of 2004 CO2 emissions that are displaced), applicable to 50% of the income tax during the first 10 years of commercial operation. Exemption from the income tax, for a period of 10 years, from the entry into Biomass Any Law 44 of 2011 commercial operation. Tax credit of up to 5% of the direct cost of the project for civil works that becomes Renewables Any Law 45 of 2004 of public use. Tax credit applicable to income tax for a maximum of 5% of the total value of Wind Any Law 44 of 2011 direct investment in works converted into infrastructure for public use. Exemption from all national and municipal tax, for the term of 15 years, to the Wind Any Law 44 of 2011 activities of production of mechanical, electronic, electromechanical, metallurgical and electrical equipment destined to manufacture wind power equipment in the national territory.

Type of Description Source Size Reference Support (MW) Exemption from the payment of industrial license, commercial license, notice of Biomass Any Law 44 of 2011 operation, as well as the control, surveillance and inspection fee, taxes and / or municipal fees, for a period of 10 years, starting from commercial operation. Access to the grid Exemption from the payment of the transmission and distribution tariff. Renewables < 10 Law 45 of 2004 Exemption from the payment of the transmission fee for the first 10 MW during the Renewables 10 < MW < 20 Law 45 of 2004 first 10 years of commercial operation. Accelerated depreciation method of equipment for wind generation. Wind Any Law 44 of 2011 Exemption from distribution and transmission charges when they sell directly or in Biomass Any Law 44 of 2011 the occasional market, for a period of 10 years, starting from commercial operation. Access to the market They can contract directly with any distribution company no matter where the Renewables < 10 Law 45 of 2004 plant is located. They can sell energy in the occasional market, sell their firm power to the Renewables Any Law 45 of 2004 distributor, to another generator or distributor or bid in the Central American market.

3.3.4. Description of the Panama Renewable Energy Auction System

It is mandatory for the distribution companies to have 100% of their demand for the next two years contracted, 90% for their forecasted demand for the years 3 and 4 and so on, as shown in Table 13.

Table 13: Mandatory contracting obligations for distribution companies in Panama. Source: Rules of Purchase 6.

Years Minimum contracting obligation (%)

1 – 2 100 3 – 4 90 5 – 6 80 7 – 8 70 9 – 10 60 11 – 12 50 13 – 14 40 15 – 21 30

This minimum contracting obligation refers to both capacity and energy. The capacity must be contracted to cover the maximum generation demand of the electricity distribution companies.

In standard auctions, all generators compete against each other (fossil and renewable). As commented, Law 43 of 2012, which amends Law 6 of 1997, allows the conduction of technology specific auctions "special Statement of objections". This modality allows to design tenders by type of technology such as wind or PV, or even a mix of technologies, according to the energy policy guidelines established by the SEN.

In the implementation of the auction, several institutions are involved, the main responsibility, falls on ETESA, which is by law the managing agent of the auction and the evaluator of offers, however, it is not a signatory of the contract. The off takers are the distribution companies.

ETESA, annually publishes the contracting report based on the requirements of the distributors and the results of the previous tenders, these documents give an idea of the need of energy and capacity to meet the mandatory minimum requirements, however, there is not a defined schedule for the auctions.

6 Rules of Purchase for the Wholesale Electricity Market, approved by Resolution AN No. 991-Elec of July 11, 2007 and its amendments

Before ETESA calls for the auction, the bidding documents must be approved by the ASEP as a regulator and inspector of the sector's activities, empowered to establish criteria and procedures for energy and power sales contracts.

Information such as administrative procedures to obtain access to the network, requirements for the achievement of a definitive construction license, as well as specifications for other tenders, spot prices and market characteristics are public and can be obtained at ASEP and ETESA web sites.

In general, for any auction, participating companies are required to have a license or concession (either permanent or temporary) for being a power producer. This procedure has to be done in ASEP, requirements are:

• To obtain a temporary generation license, it is requested, among others, to have a company in the country, to demonstrate a minimum number of years working in the sector and financial solvency. • To obtain a definitive power generation license, the agent must have approved the environmental impact study, it must be submitted to the Ministry of Environment and; must have the connection’s permits.

Recently, to obtain a license, the project developer must pay a "construction bond" and a "performance bond". These are not part of the auction guarantees, but rather the requirements for obtaining the license.

The construction bond is ten percent (10%) of the investment needed for the new power plant to be installed, which must be based on international costs of generation plants according to the technology used. This deposit must be in force until the construction of the project is finished, when it will be returned to the project developer.

The performance bond will guarantee the faithful fulfilment of the construction and operation of the power generation plants. The amounts of this guarantee are:

• Wind power US$ 500 x nominal MW to be installed.

• Natural gas US$ 2,000 x MW nominal to be installed.

• PV US$ 2,000 x nominal MW or fraction to install.

In addition to the bonds that any generator must satisfy to obtain the license, for the participation in the auctions, in order to guarantee the signature of the contract, a bid bond is demanded. Usually they were between US$ 7,000 and 10,000 US$ / MW. However, in the bidding held on November 17, 2016, bid bond was 25,000 US$ / MW.

Also, in order to guarantee the fulfillment of the obligations from the contract, a completion bond must be submitted for the signature of the contract. This guarantee will compensate for the over costs for the regulated customers due to a breach. Its value is proposed as a formula that takes into account, among other variables, the value of the contract.

Likewise, the off-taker (distribution companies) must submit a payment guarantee, valid for the duration of the contract, which is calculated as 70% of the maximum monthly power offered at the price contracted, and is devoted to cover a possible breach in the payments.

For renewable energies, there are not publicly available resource map. Resource assessment is entirely done by project developers.

The auction is site neutral. Project developers can propose any site. Similarly, there is no maximum limit to the size of projects, the only restriction is based on the approval of the environmental impact study to be provided to the Ministry of Environment.

Both, existing and new plants can participate in the auction.

All auctions in Panama are advertised in the website of ETESA. The bidding documents must be directly purchased at ETESA at a cost of US$ 50.

The auction is sealed-bid type. The project developers bid for energy and capacity. After the deadline, all the envelopes are open in front of the participants of the auction.

Since the amendment of Act 6 of 1997 by Law 57 of 2009, where ETESA is entitled to implement the auctions, there have been no cases in which no bids were submitted. However, the ETESA may, in this singularity, cancel the tender. Likewise, if the prices received were too high, it would be possible not to award the tender.

The ceiling price for auctions of wind projects was 110 Balboas7/MWh and for PV technology 140 Balboas/MWh. Hydropower auctions did not include ceiling prices. Ceiling prices are disclosed.

The award criterion of a tender is, and has been so far, the lowest price of the combination of bids, that result in the lowest cost for the off-taker. The cost of all contracts signed as a result of auctions, become part of the electricity tariff.

The awarded bidders will sign a contract (PPA) with the distribution company, usually for wind up to 15 years and PV up to 20 years. Is a pay as bid auction, the contracts are in local currency.

A portion of the contractual price, will be updated annually considering the Consumer Price Index (CPI). The portion of the contractual price that is possible to index is indicated by ETESA, and it is known as FAJU (adjustment factor), usually 0.25 (as it was in the wind auction of 2013), while in the hydropower auction of 2014, the FAJU was determined by the bidder from a value between 0 to 0.15.

7 The Balboa maintains parity with the US$.

There are sanctions for non-compliance or delays, such as the execution of the bonds. In case the proponent has a delay in entering into operation, it must operate with backup contracts.

Table 14 compiles as a summary the main design options of renewable energy auctions in Panama.

Table 14: Design of renewable auctions in Panama. Source: Own elaboration.

Design criteria Description

RE targets 70% electricity from renewables by 2050.

Regularity / There is no bidding schedule. periodicity Since 2011 there have been two wind auctions, one PV and three hydro.

No more renewable auctions are expected. Responsible The public transmission company ETESA. Authority8 Object to auction PPA, in Balboas for up to 15 (wind) and 20 (PV) years. A percentage of the price, previously determined in the specifications and that is usually 25% is updated annually with the CPI. Source of the Electricity tariff for regulated customers. funds

Technology Specific. specific vs neutral

Site specific vs Neutral. No parts of the territory are discriminated nor are areas neutral prioritized.

Size of projects. No limits to the size of the projects.

New or existing Both. Although only new plants have been awarded in wind and facilities solar auctions, contracts have been awarded to existing projects in hydropower auctions. Type of auctions. Sealed-bid.

8 Annex II provides a description of the institutional framework of the electricity system in Panama.

Design criteria Description

In presence or on- In presence. line

Prequalification There is no prequalification. criteria

Information No additional information. Same as for a standard (technology provided neutral) energy auction. Requirements To hold a license for power generation or a certificate that has initiated proceedings to obtain a license. To achieve this, the bidder must:

• Submit a guarantee per MW or fraction of US$ 500 in the case of wind power and US$ 2,000 for PV. • Have a company in the country. • Demonstrate technical capacity. • Demonstrate economic and financial solvency. Selection criteria Lowest price. of the winning bids

Establishing the Pay as bid. final price

Ceiling prices Yes, and known by the bidders.

Minimum number There is generic legislation that establishes criteria to avoid market of bidders domination by the same proponent. The auction could be cancelled if deemed onerous. Guarantees Bid bond. Usually they have been between 7,000 and 10,000 US$/MW.

Completion bond is proposed as a formula of the value of the contract. Penalties for non- Execution of the bonds. compliance or In case the proponent has a delay in the entry of operation must delays operate with backup contracts. Local content No. rules

3.3.5. Results of renewable energy auctions in Panama.

As mentioned, with the modifications made by Law 6 of 1997, ETESA carries out the auctions following the guidelines of the SEN. With the objective of defining the national electricity matrix, six technology specific auctions for renewable technologies have been carried out. Table 15 lists the technologically specific auctions made to promote renewable energy projects.

Table 15: Renewable energy auctions in Panama. Source: Own elaboration.

Year Auction Technology

2011 05-11 Wind

2013 07-12 Hydro run of river

2013 02-13 Hydro run of river

2013 03-13 Wind

2014 01-14 PV

2014 03-14 Hydro with dam

Results of wind auctions

The first auction for wind in 2011 had a ceiling price of 110 US$/MWh. The object of the auction was a PPA for 15 years. The bid bond was US$ 7,000 for each MW or fraction.

Eight bids were received, four projects were awarded. The four wind projects awarded belonged to Unión Eólica de Panama: Nuevo Chagres, Rosa de los Vientos, Portobelo and Marañón. Average price was 90.58 US$/MWh, 17.6% lower than the ceiling price.

The auction had a very low effectiveness. The start-up of the projects was scheduled for 1 January 2014 but the projects were delayed. Only the Nuevo Chagres wind farm was able to start operations at that date, but not with the total capacity.

Contrary to standard tenders, (technologically neutral), this wind auction did not require an endorsement of contracted energy against "spot" purchase. An economic penalty is applied for shortage in the generation, including shortage of generation by late startup. The penalty is calculated as a fraction (0.7) of the difference between the daily marginal cost of the energy and the price in the PPA, so it does not apply when the price from wind would have been higher than the daily average.

There is also a penalty that applies only when the coefficient between the energy produced and the contracted is less than 0.6. In this case, the missing energy is paid 5% higher than the price in the PPA.

The next wind auction was the 03-13 of 2013, wind energy was requested for a period of 15 years, from January 1, 2019 to December 31, 2033. In this tender, the bid bond was 7,000 US$ for each MW. The ceiling price published was 110 US$/MWh. PPAs resulting from this tender amounted 1,182 GWh, representing 128.57%, of the requested energy for the 15-year period, four offers were awarded resulting an average price of 96.69 US$/MWh. The price was 6.7% higher than the one obtained two years earlier.

The four projects awarded were: Naura Energy Corp., Unión Eólica Panameña, S.A. (Portobelo), Unión Eólica Panameña, S.A. (Marañón), and FERSA Panamá, S.A. Although the start of commercial operation is the first of January 2019, so it is early to evaluate the effectiveness of the tender, however, FERSA Panama S.A. as well as Naura Energy Corp., had not started construction in November 2016, so it is reasonable to question if they will be on time.

Results of photovoltaic auctions

In November 2014 was held the only PV technology specific auction, ceiling price was 140 US$/MWh.

For this auction, 36 bids were presented and five projects were awarded with a PPA at an average price of 87.25 US$/MWh for 20-year period, price was much lower than the cap price (ceiling) for this auction. With an offer seven times higher than the demand averaged contracted price was 37% lower than the ceiling price. This indicates that the auction, among other objectives, served to discover the cost of PV in Panama.

Volume awarded was 101.86% of the power needed. In this auction, the bid bond was 10,000 US$ per MW. The contracting period was 20 years, expected date of entry into operation January 1, 2017.

After being awarded, two of the project developers did not sign the contract, so their bid bonds were executed. One of the projects started operation at the end of 2016, before the expected date, the other are delayed. Similar to wind auctions, effectiveness is very low.

Despite the low effectiveness of the auctions in promoting new PV capacity, it should be noted that in November 2016, Panama had 10 PV utility scale grid connected projects and only one has been awarded through a tender. The rest of the PV projects do not have long term contracts, and are selling their power in the wholesale electricity market.

Results of hydropower auctions

The auction 07-12, was technology specific for hydropower, the object of the auction was a 15-year PPA from March 2013 to 2027. Contracted energy represented 78.24% of the volume tendered, average price was 124.51 US$/MWh. For the hydropower auctions, there is no ceiling price. Eighteen bids were received. Two bids were rejected. One because the bid bond was not valid, the other bid rejected did not have a power generation license. Eight projects were awarded, as of November 2016 the implementation status is: (i) two were existing projects; (ii) two entered into operation on time; (iii) one entered into operation late; (iv) three are still under construction.

Auction 02-13 received 14 proposals from existing and future projects. Nine companies were awarded, average price was 130.61 US$/MWh, achieving a coverage of the

monthly requirement of 111.86%. All have started operations, except one plant that will start operating with one year delay.

Auction 01-14 was specific for hydropower plants with dams. Capacity requested was120 MW by 2020 and 150 MW for the rest of the period (year 2040). The object of the auction was PPA for 20 years. For this auction, the bid bond was of 10,000 US$/MW.

Only one offer was received by the Generation Company S.A. (EGESA), 120 MW for the entire period at a price of 140.93 US$/MWh. The project should start operation in July 2020, so the success of this auction cannot yet be determined. Certainly, it is a challenge to implement this project because of the great opposition of citizens against hydropower.

As mentioned, there is no limitation in the capacity of the projects, although many of the hydroelectric projects developed are less than 10 MW, this is mainly due to the size limit to benefit from the fiscal incentives.

Other technologically neutral auctions

In 2012, the LPI-ETESA-01-12 and LPI-ETESA-04-12 auctions were carried out, although they were not exclusive to renewable, they had substantial participation of hydro projects.

Auction 01-12 offered PPAs for the period from January 2016 to December 31, 2030. 270 MW were requested for the first 3 years and 350 MW for the rest of the period. Five bidders, all hydropower, were awarded. In this auction, one of the projects was able to be awarded thanks to the application of the preference for renewables, a hydro project was less than 5% more expensive that a fossil fuel project awarded, so the hydro project was contracted. The average price was 114.12 US$/MWh.

One of the projects, Hidroeléctrica Bajo Totuma, did not present the completion bond for the signature of the contract and therefore the contract was canceled and the bid bond was executed.

The remaining four projects entered into operation on time, two of them were existing plants. In the LPI-ETESA auction 04-12, energy was requested for the period 2012-2015, 21% of the volume was awarded to hydropower projects.

Also in 2012, auction 03-12, a wind project was awarded at a price of 127.50 US$/MWh, although it did not reach the financial closing.

In the auction 03-15 of 2015 a wind project was awarded at a price of 105.73 US$/MWh.

In the technology neutral auction 02-16, held November 17th, 2016, bids were encouraged to establish consortiums to offer firm power and energy from various projects in the same bid. So, a bid could contain different technologies, which guarantees capacity and power at an optimum price.

Table 16 shows the results of the renewable energy auctions carried out in Panama.

Table 16: Result of renewable energy auctions in Panama. Source: Own elaboration.

Technology Year Contracted Success Number of Average price Price On time With delay Canceled energy rate projects of contracts ceiling (nº) (nº) (nº) (MWh) (%) (US$/MWh) (US$ / kWh) 2011 975,476 100 4 (268.0 MW) 90.58 0.11 1 3 0 Wind 2013 1,181,950 129 4 (340.5 MW) 96.69 0.11 * - - Solar 2014 660,166 102 5 (95.4 MW) 87.25 0.14 1 2 2 Hydro run of river 2012 6.491,853 73 8 114.12 NA 4 4 0 Hydro with dam 2014 6,279,791 82 9 140.93 NA ** - - * Come into operation in 2019. ** Start operations in July 1, 2020.

3.3.6. Discussion and lessons learned.

Panama, in its attempt to diversify the energy matrix, implemented technology specific auctions to accelerate the development of hydro, wind and solar projects.

Despite the great deployment of renewable sources that Panama has had in recent years, where the largest wind farm in Central America was developed, there are possibilities to improve the design of the auctions and evolve to what would be a second stage for the large-scale development of renewable sources.

One of the main weaknesses detected in the auctions has been the low effectiveness. Cancelations and delays are the norm.

Insufficient financial guarantees, very affordable price of the bid documents, no prequalification of bidders, and light reputation requirements, has allowed the participation of purely speculating developers, this was particularly the case for the PV auction in 2014.

While it is true that the financial guarantees have been executed, it is a challenge for both, the regulatory authority and ETESA, to guarantee the seriousness of the bids as well as the execution of the projects without delays. One of the measures implemented to correct this problem has been to request for additional financial guarantees while requesting the construction license.

The reason for the delays depends on each project, but one of the main has been the lack of access to adequate financing. This is due in part to underdeveloped projects that do not convince financial institutions.

Having a fix schedule for the auctions would allow current and future project developers to prepare their offers in time. In the case of wind, to demand the bids to present a multi- year resource assessment would give greater security to the investors.

Other reasons for the delays are more common to any energy project in remote areas. Problems due to inclement weather, opposition of local population, or difficulty in obtaining land use and other rights.

For the future, the SEN has stated that thanks to the advances in technology and the lessons learned on auctions at international level, it is not foreseen to conduct technology specific auctions rather, there will be technology neutral auctions where renewables and conventional compete against each other.

While it is true that in some technologically neutral auctions wind projects have been awarded, according to practitioners, it will be necessary to redesign technology neutral auctions to promote diversity and allow greater incorporation of renewables. In this regard, there is great expectation from the result of the tender held in November 2016 where the same bid can contain several technologies, mitigating risk by using their complementarities. Finally, there is currently a debate on the possibility of favoring

renewable energy in technologically neutral auctions by assessing the carbon content to select the winning bids.

3.4. Uruguay

3.4.1. Introduction

In order to understand the successful development of renewable energies in Uruguay, the history of power generation in Uruguay should be analyzed and in particular, the existence of the vertically integrated state-owned power company, the National Administration of Power Plants and Electric Transmissions (UTE), founded in 1912. For more than one hundred years, the central aspect has been a continuous growth of electricity demand which has doubled every 20 years approximately.

If the last 100 years are divided in thirds, during the first third, the generation was essentially thermal generation. During the second third, the hydroelectric development occurred. It is important to highlight that in 1983 the hydroelectric production was on average more than twice the electric power demand, which is very remarkable. In that second third, thermal energy transitioned from coal to oil and took over the role of back up capacity.

At the end of the 20th century, due to demand growth and the economic and technical impossibility of building new large hydroelectric plants, the interest in new thermal units increased, and in addition the interconnection with Argentina started to gain relevance. In the 1990s, in Argentina, generation prices were three to four times lower than those in Uruguay. Imports were the norm and in 15 years, there were no important investments in generation capacity in Uruguay.

The 2001 economic crisis lead to the non-renewal of the agreements with Argentina. Regarding the growing demand, the short-term solution was to increase the use of thermal energy considerably - in a period of sustained growth of oil prices.

In order to provide solutions in the medium term, apart from installing new thermal generation plants, UTE started to test the use of non-conventional renewable energies (NCRE) through its own investment or through power purchase from private producers with long term agreements initially from biomass and later on with a strong boost to wind generation.

Currently, Uruguay is completing the transition from fossil resources to renewable resources. After the finalization of ongoing projects, power generation in Uruguay will be, during many hours throughout the year, 100% renewable with competitive prices in the regional market.

In 2015, Uruguay was ranked third according to investments in renewable energy per unit of GDP (REN21 2016). In the same year, the “Climatescope” indicator which analyses the regulatory framework and investment conditions for renewable energy in emerging markets placed Uruguay in a well-deserved fourth place among Latin-American countries, behind Brazil, Chile and Mexico (Fomin et al., 2015). Finally, Uruguay is the sixth most attractive country from the LAC region for investments in renewable energy according to the attractiveness index RECAI indicator (EY 2016).

3.4.2. Regulatory Framework

The Energy Policy of Uruguay for the period 2005-2030 is the main framework for energy policy in Uruguay. It was approved by the Government in 2008 and backed by the Multiparty Energy Commission formed by political parties with parliamentary representation. Among the strategic lines, the diversification of sources was established for the supply of energy, and it intended to encourage the valorization of locally available energy resources and in particular, renewables. In the context, the wind energy target of 300 MW by 2015 had been formulated, this target was updated in 2012 to 1.200 MW by 2015.

With the enforcement of Law 16.832 of 1997, the electricity wholesale market was created and the contribution of private electricity generators was regulated. The State´s responsibilities were separated. The Ministry of Industry, Energy and Mining (MIEM) is now in charge of the energy policy. The regulatory entity URSEA was created, as well as, the power market operator ADME. Finally, the State´s business activity was limited to UTE. Furthermore, free access to transmission and distribution networks was established. Moreover, the possibility for independent power producers to execute supply agreements directly with distributors and major consumers was created.

With the new decrees passed by the MIEM concerning renewable energy, especially decrees 77 of 2006, 397 of 2007, 403 of 2009, 159 of 2011 and 424 of 2011 regarding contracting of wind energy and decree 133 of 2013 regarding contracting of solar PV energy, the current model in practice is considered to be equivalent to a single buyer model with a major participation from UTE.

The provisions set forth in the Law, specifically the MMEE Regulatory Decree 360 of 2002 establishes in detail the operation of the wholesale market, contracts and spot market, energy imports and exports, rules dispatching, and the rights and obligations of the representatives and participants, as well as, the provisions concerning ADME. At the same time, establishes auction as the mechanism to be implemented for the fulfillment of targets in terms of generation capacity from renewable energy sources. In particular, the MMEE Regulatory Decree 360/2002, Article 298 states:

“If, in accordance with the energy policy guidelines, the purchase of part of the supply for the participating consumers or specific type of participating consumer must be from non-conventional renewable energies, an international public auction will take place with the purpose of awarding a special contract for the installation of the generation with said energies. The auction will take place, with a bidding specifications and contract template developed by the regulatory entity, and under its supervision. For distribution companies, the cost of the contract will be passed on to tariffs”.

3.4.3. Support systems for renewable energy

Apart from the auctions system to support wind projects, there are other regulatory incentives and mechanisms for the promotion of generation from renewable sources in Uruguay.

Administratively determined tariff (feed-in tariff)

In Uruguay, auctions have been implemented to determine the price of generation and to offer a regulated tariff with no auction process later on.

The major part of the renewable generation has not been contracted through competitive processes but through the acceptance of an administratively determined tariff (feed-in tariff) by project developers. The offered tariff was the same tariff as from the auction process. Therefore, after the 150 MW wind auction of 2011, in 2012, an additional 650 MW of wind energy were contracted without auction process equaling the tariff determined, the previous year, through the auction which was 63 US$/ MWh.

In order to stimulate an early implementation of wind farms, a 100 US$/ MWh feed-in tariff was considered for the energy fed into the grid prior to the starting date stipulated in the contract, 31st March 2014.

In 2013, and after the success from wind energy, the Government decided that it was convenient for the country to diversify its energy sources and promote solar PV energy. In May 2013, Decree 133 was issued: it regulated the execution of special PPAs between UTE and suppliers that produce power with solar PV within the territory of Uruguay. The Decree established three quotas, 1 MW for projects from 500 kW to 1 MW; 5 MW for projects from 1 to 5 MW installed capacity and finally, 200 MW for projects up to 50 MW.

Projects from the third range, bigger sizes, gets a feed-in tariff of 91.5 US$ / MWh for plants entering into service before 1 June 2014, and 86.6 US$/MWh for those entering into service before 1 June 2015. This date was changed to the 31st December 2015 according to Decree 430/013. the tariff for projects from the second range is 20% higher than the one for the third range.

No project with low capacity was developed under the feed-in tariff system. Regarding small solar PV projects, it is worth mentioning that more than 8 MW have been constructed using the net-metering scheme for plants of less than 50 kW.

In the medium-sized projects range, 66% of the maximum quota has been implemented. Finally, the large solar plants range was 100% covered although the implementation of these projects is significantly delayed.

External factors are the main cause for the delay in implementation of large PV projects. One of the project developers turned out to be SunEdison, currently under suspension of payments. The crisis of the solar PV manufacturing sector caused the delay in the construction of the projects: only 80 MW out of the expected 203 MW are in operation.

Finally, Decree 367/10 establishes a feed-in tariff for biomass plants, 80 MW were contracted with a price of 92 US$/ MWh for the dispatched power. Furthermore, plants receive 59 US$/ MWh for every hour as reserve capacity to which 48 US$/ MWh would be added for the case the reserve must be made available and they are called to produce.

Priority dispatch

Likewise, priority dispatch decrees were issued for variable renewable energies, starting form Decree 567 of 2009 and following, with the last amendments in Decree 113 of 2013.

Net metering

Decree 173 of 2010, which entered into force as of 1st July 2010, implements a net metering system allowing the connection to the low voltage grid for wind, solar, biomass and small hydro power generators.

This Decree is set within in the National Energy Policy 2005-2030 and its corresponding Strategic Implementation Plan which tends to promote the use of non-traditional locally available renewable energy sources, Uruguay being the first in South America allowing the connection of the power generation from renewable sources to the public distribution network.

Tax benefits

With regard to tax benefits, these are based on a general framework for the promotion and protection of investments (Law 16.906 -Decree 455/007) described in Resolution 67 of 2002 and Decree 354 of 2009. The granted tax benefits depend on a multi-criteria evaluation of the project and these may include renewable projects. The main tax benefits which may be currently applied to renewable power generation projects are:

• Renewable power generation companies, shall be partially exempted from the Corporate Income Tax, starting with an exemption of 90% and of 40% in 2023. • Exemption of fees for the import as far as the imported goods are not competing with the local industry and manufacturers. • 100% refund of the value-added tax (VAT) for materials and services destined to civil engineering works. • VAT exemption for complete renewable energy equipment including tower, wind turbine, power control box, and charge control and power inverter”. • Exemption from the property tax for civil engineering works for a period of 8 years in Montevideo and for 10 years in-land, and on fixed assets for all its useful life.

3.4.4. Description of the auction system

Auctions in Uruguay are technologically-specific. There have been specific auctions for wind, biomass, small hydropower and solar PV; although, in some cases, they were conducted simultaneously. This was the case in 2016. The auctions were technologically- specific but simultaneous: 20 MW wind power, 20 MW biomass power and 20 MW small hydropower.

The final goal of the wind power auctions in Uruguay is to progressively replace non- renewable power with cheaper and locally available resources that are more strategic in terms of energy security.

By article 298 of the regulation of the MMEE Decree 360 of 2002, each auction is authorized by a specific decree of the Government. The regulatory agency URSEA is responsible for their execution.

Nevertheless, the auctions were interrupted in 2011, when, after the 150 MW auction, it was decided to offer the possibility that the non-awarded bids could adhere to the average price of the 63 US$ /MWh awarded bids. A total of 650 MW were contracted through this procedure in 2012. The main motivation for the adhesion was to accelerate transition from fossil fuel generation to renewable energy.

The awarded bidders must sign a PPA with the public company UTE for a certain number of years proposed in each auction (between 10 and 20 years). The price is fixed in US Dollar which means that UTE assumes the currency or exchange rate risk. The price is updated annually to reflect inflation, using a formula that includes local and US price indicators.

Article 298 of the MMEE Regulation establishes that UTE must fully reflect the cost of the PPA resulting from the auction process in the final consumer tariff. In any case, in Uruguay, the results of the auction show that the new installed capacity from renewable sources does not represent any extra cost for the regulated electricity tariff since its cost is lower than the cost of non-renewable options.

In the first auctions carried out in 2006, the size of the projects was limited to 10 MW. Following a grid stability study that was conducted by UTE, it was determined that 150 kV networks could easily integrate projects up to 50 MW. In 2010, the maximum capacity allowed was 50 MW, which at that time was considered as the optimal size for both the integration of power generated into the grid and from the logistical point of view regarding the construction of the wind farms. In addition, limiting maximum capacity promotes the spread of projects, which facilitates network management and sharing of socio-economic benefits.

Moreover, in order to promote lower prices, subsequent auctions allowed a company to bid for multiple projects, as well as, for doubling the capacity of an already awarded project, which is the maximum allowed by public procurement Law.

As for the information provided to the promoters, it has improved over time. Thus, in the first auction held in 2006, no information was provided, while in the third wind auction in 2010, which was the first large auction, UTE installed more than 30 wind resource measurement stations in telecommunication towers at a height of between 80 and 100 meters. The outcome of the measurements was shared with potential bidders as a first approximation to identify the most promising sites for a first resource assessment.

The main design option implemented to facilitate the integration of large amounts of variable generation in the grid was the obligation to install new machines equipped with power control through variable speed and variable pitch. Bids must include a grid study to ensure that power can be evacuated at the point of connection to the grid.

In addition, the last wind auction in 2011 limited the capacity to be awarded at each node and included the requirement for projects over 50 MW to include a grid monitoring system.

All the transmission infrastructure needed for the connection of the wind farm must be included in the proposal. The cost has to be recovered from the PPA. The technical project of the connection infrastructure must be approved by UTE before starting to

construction and, once completed, the transmission infrastructure must to be donated to UTE.

As for the type of auction, they are sealed-bid. It is not done using online means; bids must be delivered in person or by postal mail.

Companies are required to prove their technical capacity: they must have developed a wind farm of at least 30 MW previously and proven their financial solvency through the company’s accounts and balance sheets.

The auction is done in one single phase, there is no prequalification of bidders. The contract is awarded starting from the lowest bid, and continuing in ascending order until the total capacity auctioned is reached.

Initially, the power purchase price is the one offered, although bidders that include a share of local content that is above the minimum (20%) obtain a higher price.

In addition, the second call for 150 MW in 2011 included the purchase of power generated before the official operation start date, 31 December 2013, at a fixed tariff (100 US$/ MWh). That was done to encourage progress in project implementation and an earlier starting date for operation.

While in the agreements from the first auctions contain a provision that the energy not fed to the grid due to technical restrictions is paid, the obligation to accept curtailment was included in the PPA in the last auction.

There is no minimum number of bids needed to consider the auction result valid. There is also no ceiling price, but the regulator may declare the auction invalid if prices are not suitable for the system.

All bids must present bid bond of at least 5% of the amount of the expected PPA for half of the duration of the contract. At the signing of the agreement, awarded bids must produce a completion bond of 15% of the expected PPA amount for half the duration of the contract. These percentages are those established by the public procurement Law (TOCAF) for any public auction of similar characteristics. 80% of the guarantee be released after 6 months of operation of the plant, 20% will be released after the contract has ended and with the certification by Environment Directorate that establishes the compliance of the decommissioning of the wind farm, and of the restoring of the site.

In order to discourage the participation of intermediaries, and to cover the administrative costs of the auction, the bid documents can only be acquired upon payment of an amount established by UTE according to the importance of the auction. In the 150 MW auctions, this amount was 10,000 US$.

Bids are required to guarantee a local content of 20%, in addition, 80% of workers involved in the operation and maintenance must by Uruguayan, starting from the second year of operation.

Table 17 compiles, as a summary, the main design elements for renewable energy auctions in Uruguay.

Table 17: Design elements of wind power auctions in Uruguay. Source: Own elaboration.

Design Element Description

RE Objective 1.200 MW wind by 2015.

Regularity/ They were annual auctions until the Government decided to periodicity accelerate the development by offering a fixed tariff skipping the auction process. Responsible URSEA (Energy and Water Utilities Regulatory Agency) Authorities Object to Auction The PPA with the public company UTE for a certain number of years proposed by the bidder (between 10 and 20 years).

The price is fixed in US$ so UTE assumes the currency fluctuations or exchange rate risk. The price is updated annually to reflect inflation, using a formula that includes local and US price indicators.

Source of funding Electricity Tariff.

Technology- Technologically-specific (biomass, wind, small hydro)- although, in specific vs Neutral some cases, they are carried out simultaneously.

Site specific vs Neutral but there are limited capacities to be awarded at each neutral node.

Size of the 50 MW maximum capacity per project- although in the first auction projects of 20 MW of 2006, it was limited to 10 MW per project.

New vs existing New capacity. installations Auction type Sealed-bid.

In presence or on- Bids must be delivered in person or by postal mail. line Prequalification Companies are required to demonstrate previous experience in Criteria the construction of wind farms similar to the ones being offered and proven financial solvency through the company’s accounts and balance sheets.

Information and Bidders can access wind resource assessment by UTE. transparency

Design Element Description

Requirements Technical: • Grid connection studies. • For wind power, the equipment must be certified by an independent certifying entity. • New machines with wind turbine power control through variable speed and variable pitch.

Local content: • Bidding companies shall be legally constituted in the country. • The national component of the plant shall be of at least 20% and the price is increased if this share is overpassed. • For operation and maintenance, 80% of the personnel shall be Uruguayan citizens. • The control centers shall be located in Uruguay. Selection criteria Lowest price. of winning bids

Setting the final Pay as bid, although offers that have a percentage of local price content above the minimum (20%) obtain a higher power purchase price. Ceiling prices No.

Minimum number There is no minimum number of bidders needed to consider the of bidders auction result valid but the regulator may declare the auction invalid if prices are not suitable for the system. Guarantees • Bid bond of at least 5% of the amount of the expected value of the PPA for half of the duration of the agreement. • At the signing of the agreement, awarded bids must produce a guarantee of Performance bond of 15% of the expected PPA amount for half the duration of the agreement. Penalties for non- Penalties for delays are discounted from the PPA amount. compliance or As a last resource, the guarantees may be executed if justified. delays Local content 20%, in addition, 80% of workers involved in the operation and rules maintenance must by Uruguayan, starting from the second year of operation.

3.4.5. Results of renewable energy auctions in Uruguay

In 2006, the first renewable power generation auction was implemented in Uruguay. It consisted of 20 MW wind, 20 MW biomass and 20 MW small hydro auctions that were carried out simultaneously. The contract was awarded to the lowest price and PPAs were signed for a period of 20 years. There were no bids for small hydro technology due to the

lack of sites with competitive water resources. Two 10 MW wind power projects were awarded at 92 US$/ MWh as well as two 10 MW biomass projects at 108 US$/ MWh.

Given the satisfactory previous experiences, in 2010 a new auction was held for three 50 MW wind farms, also with 20-year PPAs. This time the average purchase price was 85 US$/ MWh.

In 2011, there were another 150 MW wind auction, three 50 MW projects were awarded with 20-year PPAs. This time the result was an average price of 63 US$/ MWh. The offers reached a total of 850 MW, with the most expensive ones above 100 US$/ MWh. In 2012, when the Government was about to launch a new auction, the non-awarded bidders claimed they were willing to implement the wind farms at a price of 63 US$/ MWh. The not-successful bidders of the auction were then offered the adhesion with contracts at the same price resulting from the last auction. The process ended in February 2012 with the contracting of 650 MW, consisting of 13 wind farms of 50 MW each.

Overall, between 2006 and 2011, four auctions were carried out and 100% of the auctioned capacity (340 MW) were contracted; only one project was canceled and the other nine awarded projects have entered into operation, though with a delayed start. The main reasons why the operation start of the projects was delayed were:

• The requirement from financial institutions to submit certified annual resource measurement studies. Only for the last auction UTE provided project developers with indications of the measured potential. • The difficulties of reaching land lease agreements.

In addition to the auctions and the adhesion to a feed-in tariff for those who lost, since 2014 the Government has promoted, another 420 MW, consisting of six 70 MW farms, in the form of public private partnership (PPP)companies. In these cases, UTE manages the PPP and is also the buyer of the electricity. The PPA signed between the UTE and the PPP is remunerated with the same tariff that was the result of the last auction: 63 US$/ MWh.

Finally, a wind leasing experience was also carried out for a 70 MW farm. In this case, UTE provided the site and the wind resource assessment and tendered the construction and operation of a wind farm on the site to an investor. UTE will lease the wind farm for 20 years as well as its operation and maintenance and will have at the option to buy it at the end of this period. This procedure resulted in a MWh-price significantly lower than the one of the auctions since the risk of the resource is on UTE.

In summary, between 2006 and 2011, four auctions were held. 100% of the auctioned capacity was contracted, and the ten winning projects had a combined capacity of 340 MW.

Due to the large number of bids received in the last auction held in 2011 and the desire to accelerate the energy transition to renewable resources, the government proposed contracts at 63 US$/ MWh. 650 MW were contracted in this way, out of which two were cancelled later and the rest are entering into operation with some delay.

Seven other projects, six as PPP and one in leasing, with a total capacity of 490 MW, are promoted by the public company UTE.

It can be said that of the 1,500 MW of wind power that will be operational in 2017, only 340 emerged from a competitive auction procedure. In addition, although the auction held in 2011 served to establish prices and set the prices for the subsequent wind farms, this has continued to be used until 2014, which seems a long period of time taking into account the technological development and the dynamic wind power market.

As previously mentioned, the auctions for small hydro technology were unsuccessful due to lack of sites with a competitive resource. Biomass auctions were more an industrial policy to support paper industry rather than an energy policy decision.

Table 18 describes all the renewable energy auction results achieved in Uruguay.

Table 18: Result of electricity auctions form renewable energy sources in Uruguay. Source: Own elaboration.

Average Capacity Contracted Success Number of price of On time With delay Canceled Technology Year auctioned capacity rate projects contracts (nº) (nº) (nº) (MW) (MW) (%) (US$/MWh) 2006 20 MW 20 MW 100 2 92 - 2 - 2007 20 MW 20 MW 100 2 92 - 2 - Wind 2010 150 MW 150 MW 100 3 85 - 2 1 2011 150 MW 150 MW 100 3 63 - 3 - 2013* 200 MW 63MW 32 2 63 - 1 1 Biomass 2006 20 MW 20 MW 100 2 108 - 2 - Mini hydro 2006 20 MW - 0 0 - - - - * This tender was made for promoters who ensure an industrial consumption.

3.4.6. Discussion and lessons learned.

The large-scale development of renewable energies is based on a clear, stable and long-term policy aiming to reduce the negative impacts of fossil fuel use on economic development and energy security.

Institutional capacities and the required regulatory framework have been developed. Based on existing strong institutional capacities at UTE, capacities were strengthened mainly at UTE and ADME. The electricity market regulation was adapted, and specific regulation for the promotion of renewable energies was created as well as the regulations that affected transversally were modified.

The gradual implementation has been one of the success factors of the wind auction model in Uruguay. It has allowed for the adaptation of the design and to overcome barriers that the winning projects of the first auction were facing. Thus, after the first 20 MW auction, the need to adapt the legislation related to land to allow the leasing for wind farms was identified, or the need to include international arbitration in the PPA. This first auction also served to receive price indications.

Two important success factors are found in Decree 360/2002 - Electric Market Regulatory Framework - Article 298 that allows the contracting of power without offering base load and that stipulates the transfer of the cost of these contracts to the final consumer tariff. The fact that it was stipulated by law that the cost of such contracts could be reflected by UTE directly in the final consumer tariff was an important aspect for the trust of project developers and financial institutions, which allowed UTE to conclude long-term contracts.

In addition to international arbitration, two of the most relevant aspects in the design of contracts (PPA) have been the determination of prices in US Dollar, thus UTE assumes the risk of currency and exchange rate fluctuation, and the annual price update to reflect the evolution of inflation.

Due to the initial lack of experience in financing wind farms in Uruguay, the tender specifications offered the possibility of obtaining contracts for a period between 12 and 20 years. Most of the successful project developers concluded contracts for 20 years.

The design options for bidding rules and PPAs have also been key to the gradual and large-scale integration of variable power into the grid in a safe and stable manner. Some relevant aspects have been the requirement of the latest generation machines, the limitation of the maximum capacity per project, and the limitation of the power to be contracted per node in the tenders of greater volumes. In addition, there is the inclusion in recent contracts of the acceptance of curtailment due to grid constraints.

Uruguay has been one of the most ambitious countries in terms of using auction design to maximize the macroeconomic impact of renewable energy in the country by requiring not only a percentage of local content (20%), but also requesting employment of Uruguayan personnel for operation and maintenance (80%). 81

The definition of local content is quite broad, including, among other things, civil works or freight done by national companies. The maximum local content achieved by a project has been 35%.

With respect to local content, there is widespread conviction by project developers that local content requirements made projects more expensive. No local industry has been created, although companies that provide services have been created, which currently offer their services abroad. The local content certification process was not defined in the bidding rules, it was designed only later on, which generated additional and unexpected administrative burdens for the project developers.

Finally, in terms of local content, the requirement to carry out the operation and maintenance with Uruguayan staff starting from the second year of operation is a matter that would have happened anyway according to project developers, since it is the usual company’s strategy to train local staff for operation and maintenance during the life span of the wind farm.

The lack of certified resource measurement has led to delays in the financial closure of projects as the financial institutions have required multi-year series of certified measurements. The possibility of providing a wind map would make the on-site resource measurement more efficient and shorten the time needed to close the financing of the projects.

Although there are some delays, the success rate in Uruguay for wind technology is very high. This is primarily due to technical and financial reputation criteria, as well as the financial guarantees required from project developers. It is important to highlight that the required guarantees are not exclusive to the energy sector, they are part of the public procurement regulations of the Uruguayan state. A share of the performance guarantee is maintained until the project is dismantled to ensure that the environmental impact is minimized throughout the life of the project and after decommissioning.

In addition to the experience in the implementation of auctions for the purchase of renewable energy, the large-scale development of renewable energy and, in particular, the wind in Uruguay helps to dismantle some myths, demonstrating that:

• The integration of renewable energies into the system is rather simple. Wind energy presents variability, but not intermittency. In the case of Uruguay, the hourly wind variations are much smaller than the instant variations caused by large thermal or hydroelectric units. In addition, this variability is predictable with sufficient anticipation and high precision so it can be argued that the large-scale development of wind energy in a geographically dispersed manner can guarantee base load. The large-scale development of wind energy has been carried out with a minimum contribution of thermal back up capacity thanks to the fact that Uruguay enjoys a very flexible power system due to the large hydroelectric plants that compensate the wind variability. On the other hand, wind generation displaces the hydroelectric plants in the hours of resource abundancy, it saves the use of water and this increases the base load character of the wind-hydro combination.

o So far, wind energy in Uruguay has established two records: It supplied 95% of consumption in one hour and 69% in one day. With the completion of the wind farms currently under construction, it is expected that it will exceed 100% in many hours of the year.

• It is high quality power. The evolution of the technology into a generation type dominated by variable speed and variable pitch control allows the injection of high quality power into the grid.

• It is cheaper. For countries without local availability of fossil resources, renewable energy is cheaper than conventional energy. Specifically, in locations with a high wind potential of 3,950 hours per year in Uruguay, wind energy is competitive against a combined cycle with gas (6.2 US$/ MMBTU) or fossil fuel based power generation (40 US$/ barrel).

3.5. Auctions 2016: Peru, Mexico and Argentina

3.5.1. Peru's fourth renewable energy auction

The 2016 auction was already the fourth auction carried out in Peru since 2009. Globally, Peru is a good example for successful implementation of auctions to promote new renewable capacity. In the course of the four auctions the electricity price for wind decreased by 43% and by 78% for electricity from solar PV. Some of the keys to this success have been: (i) clear medium-term renewable electricity targets; (ii) analysis of the results and revision of the auction design based on the lessons learned, and (iii) transparency in the process.

Auctions in Peru are technology-specific. Table 19 gives an overview of the minimum prices obtained in each of the auctions in US$/MWh. The month indicated is the month on which the contract was awarded.

Table 19: Minimum prices for renewable energy resources Peru (US$/ MWh). Source: Own elaboration.

July 2010 August 2011 December 2013 February 2016 Wind 65.52 69.00 - 36.84 Solar PV 215.00 119.90 - 47.98 Biomass 52.00 99.99 - 77.00 SHP 55.00 47.40 50.50 40.00

Table 20 presents the design used in the renewable energy auction carried out in 2016 in Peru.

Table 20: Design elements of the 4th renewable energy auction in Peru. Source: Own elaboration.

Design element Description

RE Objective Long term objective of the auctions is to reach 5% of electricity from renewable sources (excluding hydro) by 2016. Regularity / • First auction: periodicity ➢ First call: February 12, 2010. ➢ Second call: July 23, 2010. • Second auction: August 23, 2011. • Third auction: December 12, 2013. • Fourth auction: February 16, 2016. Responsible Supervisory Body for Investment in Energy and Mining authority (OSINERGMIN) 84

Design element Description

Object to auction PPA with a duration from the starting operation date until December 31, 2038.

Total amount of energy auctioned: 1,750,000 MWh/ year.

The tariff (in US$) is guaranteed up to the amount of energy contracted. Tariff is updated with a formula established in the tender specifications. Source of funding The cost is passed on to the electricity tariff. Technology Technology-specific auctions: specific vs neutral • Biomass: ➢ Forest residues: 125,000 MWh/ year; ➢ Agricultural solid waste: 125,000 MWh/ year; ➢ Municipal solid waste (incineration): 31,000 MWh/ year; ➢ Municipal solid waste (biogas): 31,000 MWh/ year; • Wind: 573,000 MWh/ year; • Solar PV: 415,000 MWh/ year; • Small hydropower projects: 450,000 MWh/ year. Location-specific Location-neutral vs. neutral Size of projects Hydro < 20 MW. New vs existing New facilities. facilities Types of auction Sealed-bid. In presence or on- In presence. line Information and Tender specifications (US$ 5,000). transparency All information about previous auctions is made available on a web-portal to ensure transparency. Requirements Financial requirements: • Subscribed and paid-in share capital of at least US$ 100,000 per MW to be installed.

Technical requirements:

• Measurements and/ or renewable resource assessments carried out for a period of not less than one year. • Equipment to be installed must be new and manufacturing for the equipment cannot date back longer than two years. • Minimum of two years of experience in electricity generation. Selection criteria Lowest price. of winning bids

Design element Description

Establishing the Pay as bid US$/ MWh. final price Ceiling prices Ceiling prices calculated by OSINERGMIN in US$/ MWh for each type of renewable energy generation technology. The ceiling prices are confidential. Minimum number There is no minimum number of bidders. of bidders Insufficient If, during the bidding process, the energy demanded cannot be awarding fully covered, a second bidding round will be carried out. In the event that also in the second round, the demand is not covered completely, it will be declared partially or totally invalid, as appropriate. Guarantees Bid bond: US$ 50,000 per MW to be installed. Completion bond: US$ 250,000 per MW installed. Guarantee to challenge the result: US$ 2,000. Penalties for non- In case OSINERGMIN finds that the project is in delay, OSINERGMIN compliance or will request the project developer to increase their guarantee of delays completion by 20%. In the event of non-compliance, the Peruvian Ministry of Energy and Mines may terminate the contract. Local content No. rules

In the frame of fourth renewable energy auction, regardless of hydropower, the following projects were presented: two biomass projects, 34 wind projects, and 48 PV projects. In the first round two biomass projects, one wind project, and one PV project were awarded. In the first round 283 GWh could not be awarded. This remaining required energy was auctioned in a second round in which bidders reduced their bid prices. For example, a wind project reduced the bid by 37% in this second round. Although all the energy was awarded in the second round, only when the plants entry into service, the effectiveness can be conclusively assessed.

Table 21 shows the minimum prices awarded as well as the ceiling prices. For wind technology, there is a difference between the ceiling price and the minimum price awarded of 43%, for PV this difference is 45%, and zero for bioenergy technologies.

Table 21: Minimum and ceiling prices from the 4th renewable energy auction in Peru. Source: Own elaboration.

Minimum price Ceiling price (in Reduction (in %) (in US$/ MWh) US$/ MWh) Wind 37.83 66.00 43 Solar PV 47.98 88.00 45

Biomass 77.00 77.00 0 SHP 40.00 60.00 33

Although the cost efficiency of auctions depends on many design factors, international experience suggests that auctions are especially efficient for solar PV and wind energy projects because of the degree of standardization of such projects and as opposed to the greater complexity of biomass projects. Biomass projects in the fourth auction in Peru were awarded at the ceiling price, this could be further evidence for this assessment. In this respect, the data also indicates that wind projects with capacities ranging from 18 MW to 126 MW, but with similar equivalent hours, 4,500 hours a year, were awarded with very similar prices of around 38 US$/ MWh. It can therefore be concluded that the bid prices depend largely on the availability and quality of the renewable resource rather than on costs for project development and construction.

3.5.2. Mexico's first long-term auction

The Mexican 2013 energy reform has raised high expectations for renewable energy development in Mexico, the second largest economy of the LAC region. In March and September 2016, two long-term contracts auctions were carried out. In the frame of these auctions, Mexico was asking for bids that include a package consisting of energy (MWh), capacity (MW) and certificates of clean energy (CEL)9. With the first auction, tender bids offering overall 6.36 TWh of clean energy, 6.36 million CEL, and 500 MW per year of power were awarded.

Renewable and efficient cogeneration technologies could offer all three products energy, electricity and CELs. Conventional power plants could exclusively bid to supply capacity. Table 22 gives an overview of the elements of the first long-term auction of 2016 in Mexico.

Table 22: Design elements of the first long-term auctions in Mexico. Source: Own elaboration10.

Design elements Description

RE Target 35% of the electricity of renewable origin by 2024.

Regularity / Carried out annually, the 2015 auction was delayed and carried periodicity out in 2016.

9 The CEL is a renewable energy certificate sold to electricity suppliers to certify their mandatory share of clean energy sources. 10 http://www.cenace.gob.mx/Paginas/Publicas/MercadoOperacion/SubastasLP.aspx 87

Design elements Description

First auction: March 2016, bids had to include exclusively renewables to supply energy. Second auction: on September 2016, technologically neutral. General possibility of additional auctions. Responsible National Energy Control Center (CENACE). authority Object of the Contracts with a duration of 15 years for energy and for a period auction of 20 years for CEL. Indexed in US$ or Pesos as per bidder’s choice. Awarded: 6.36 TWh of clean energy, 6.36 million CEL, and 500 MW annually of capacity. Projects must enter into operation on March 28, 2018. Source of funding The cost is passed on to the electricity tariff.

Technology Technology-neutral for renewables and cogeneration. specific vs neutral Site specific vs Neutral but capacity is limited for each node. neutral Size of projects There is no upper limit for project size. However, there is a connection capacity available at each node or interconnection zone. Auction types Sealed bid.

In presence or on- Using a web platform created to conduct the auction. line Information and Transmission infrastructure, interconnection and export transparency capabilities. Marginal prices by zones and their projection. The bidding documents are publicly available and free of charge. Any interested party can consult the documents. Renewable resource maps are not available. Requirements Technical capacity: Participating companies must prove that they have successfully built and operated projects using similar technologies as mentioned in their bid in the last 10 years. Moreover, the installed capacity of these previous projects must amount to more than 33% of the size of the project offered with the current bid.

Financial capacity: Participating companies must prove that they acquired the necessary financial resources to develop projects similar to the submitted bid.

Legal capacity: Companies must be legally constituted. Selection criteria The lowest "adjusted" prices: The prices offered by the projects are of winning bids adjusted according to the average price of energy in the interconnection node (expected differences), and the hourly and seasonal distribution of energy (time adjustment factors). Establishing the Pay as bid. final price

Design elements Description

Ceiling prices Established by the regulator for energy, capacity and CEL.

Minimum number The supply has to exceed the demand by a certain percentage of bidders set out in advance. Guarantees Bid bond will be calculated by each bidder according to the following: • 300,000 UDIs11, regardless of the number of bids, plus; • 65,000 UDIs per MW of capacity that it intends to offer in the auction, in one year, plus; • 30 UDIs per each MWh of electricity that it intends to offer in the auction, in one year, plus • 15 UDIs for each CEL the bidder intends to offer in the auction, in one year. Completion bond: • 65,000 UDIs per MW of capacity offered per year, plus • 30 UDIs per each MWh of electricity offered per year, plus • 15 UDIs per CEL offered per year. Penalties for non- Execution of the guarantees. compliance or Economic penalties for generation deficit. delays Local content No. requirements

The call for the first long-term auction was published in November 2015 and was awarded on March 31, 2016. The prequalification documents were submitted by 103 bidders offering a total of 102 TWh and 109 million CEL. After the rejection of some bids and voluntarily withdraws, 69 bids participated in the auction. Finally, ten bids were awarded.

53% of the pre-qualified bids offering energy (MWh) were solar PV projects, 46% wind projects and 1% cogeneration. It was an auction with a high degree of efficiency since, after applying the bid selection process, 84% of the energy (MWh) and the CELs requested with the auction were covered with a total of 17 solar PV projects (1,689 MW) and 5 wind farms (396 MW). It was also very efficient, price for solar PV were in the range of 35 to 68 US$/ MWh for energy supply (MWh) and CEL, and for wind power the range was from 43 to 68 US$/ MWh and CEL. The actual prices achieved were 26% below the estimated local marginal prices for electricity.

The auction is considered a success also for other factors, such as: (i) recognizes the value of the energy delivered in locations, and hours, in which there is a deficit. Regional adjustments were included in the evaluation of bids, respectively rewarding or penalizing

11 UDI: 5.443 Mexican Pesos.

areas where new capacity was required or where there was already an oversupply; (ii) there was a high degree of information flow and transparency, making all necessary information on transmission grids and marginal prices publicly available; clear timelines and high level of public consultation (PwC 2016).

Some of the success factors for solar PV technology have been: (i) the pre-existence of a large number of projects in a very advanced state of development; (ii) there is currently no evacuation capacity in the main wind resource areas; (iii) the process for selection of bids including factors for geographical adjustments favoring areas with high solar irradiation; (iv) manufacturers of solar panels participate as project developers in consortia to place their product, being willing to bid at very competitive prices (Jiménez 2016).

In September 2016, the result of the second auction, in which renewables actually competed with conventional energy, was announced. In terms of technologies, 71% (850 MW) were combined cycles and the rest renewables: 184 MW solar PV, 128 MW wind and 25 MW geothermal. The average price for renewables stood at 33.47 US$/ MWh, representing a 30% reduction compared to the first auction.

3.5.3. First RenovAR auction in Argentina

Argentina's GENREN program awarded through auctions 895 MW of renewable energy, including 754 MW wind power, in 2009. It is estimated that of the projects awarded only 10% were implemented. The reason for the low effectiveness of this program is not found in the auction's design itself, but is rather a result of an international situation in which Argentina faced severe challenges and restrictions with access to international financing (ICTSD 2016).

Following the 2015 elections and the formation of the new government, the Argentinian Renewable Energy Plan (RenovAR) aiming to promote renewable energy reintroduced the auctions as a way to promote large-scale deployment of electricity generation from renewables. In September 2016, the first auction took place. The bids received exceeded six times the capacity auctioned. Table 23 presents a description of the design elements for the renewable energy auction carried out in 2016 in Argentina.

Table 23: Design elements of the 2016 renewable electricity auction in Argentina. Source: Own elaboration.

Design element Description

RE Target RenovAR Renewable Energy Plan 2016-2025. Share of renewables in electricity of 8% by 2018 and 20% by 2025.

Regularity / The first auction RenovAR 1.0 was carried out in September 2016. periodicity A second round 1.5 was conducted in November 2016. Second auction is expected in second half of 2017. Responsible Operator of the electricity market (CAMMESA). authority

Object to auction The contract is concluded with CAMMESA as off-taker. Duration 20 years. Contract in US$. Updated annually. Source of funding The cost of renewables is transferred to the electricity tariff.

Technology Technologically specific, although it is performed simultaneously specific vs neutral for five technologies. Capacity (1,000 MW tendered): • Wind power: 600 MW. • Solar PV: 300 MW. • Biomass: 65 MW. • Biogas: 15 MW. • Mini-hydro: 20 MW. Location specific No location is excluded or prioritized. The location of the plant is vs. neutral exclusively the decision of the developer. Nevertheless, there were limits of maximum capacities by nodes.

Design element Description

Size of the • Wind: 1 to 100 MW. Energy to be offered P90. projects • Photovoltaic: 1 to 100 MW. • Biomass: 1 to 65 MW. • Biogas: 1 to 15 MW. • SHP: 0.5 to 20 MW. New or existing New capacity, extensions and/ or repowering. facilities

Type of auctions Sealed bid.

In presence or Offers must be delivered physically in person or by mail. online

Information Tender documents (150,000 Pesos12). provided No renewable resource maps are available. The information on administrative requirements, such as access to the grid or the definitive license are made public on the CAMMESA website. Requirements • Companies must proof to have assets with minimum net value of US$ 250 thousand per MW offered. • Proof of rights on the site. • An environmental approval. • A certified resource assessment report (12 months minimum duration for wind measurements). • Energy output studies (corresponding to the generation equipment to be used). • Process for authorization as a electric market agent in MINEM initiated. • Static and dynamic connection grid study, according to the CAMMESA technical procedure. Selection criteria The offer with the lowest "adjusted bid price", up to cover the of winning bids quota by technology and without exceeding the maximum admissible capacity of the node. Adjusted bid price is the result of applying a factor to the bid price. Factor penalizes losses and favorizes early entry into operation. Determination of Pay as bid, adjusted annually according to published factors. the final price

Ceiling prices Calculated by the Ministry of Energy and Mines, they are disclosed during the opening of the bids. • Wind: 82 US$/ MWh • Solar: 90 US$/ MWh • Biomass: 110 US$/ MWh • Biogas: 160 US$/ MWh

12 9,375 US$ approx. 92

Design element Description

Minimum number There is no minimum number of bidders. of bidders

Insufficient In the event that the full amount auctioned for one or several awarding technologies was not awarded, the remaining demand can be added to another technology. Guarantees • Bid bond: 35,000 US$/ MW. • Completion bond: 250,000 US$/ MW.

Penalties for non- • Economic penalty for delayed start. compliance or • A production deficit (<10% of committed energy) can be delays carried over to the next year • A greater production deficit (> 10%) involves the direct application of a fine (160 US$/ MWh). Additional support The Renewable Energy Trust Fund proposes financing and financial systems guarantees.

Local content No for the auction but there are local content rules when applying rules to the RE Trust Fund.

Table 24 compiles the results of the first renewable energy auction within the frame of the RenovAR Plan. The results suggest that auctions are highly effective for solar and wind technologies, but not for biomass. No solid biomass project was awarded and only one biogas project (8% of the capacity auctioned), this can be another evidence that auctions are not suited for biomass projects. In addition, no SHP projects were awarded. Failure to cover the quotas in biomass and SHP increased the share of wind and solar PV projects.

Table 24: Results of the first RenovAR auction Source: Own elaboration.

Tendered (MW) Awarded (MW) Nº projects Wind 600 707.9 12 Solar PV 300 400.0 4 Biomass 65 0.0 0 Biogas 15 1.2 1 SHP 20 0.0 0

Table 25 gives an overview of the minimum and average prices offered and the maximum price (ceiling) of the first RenovAR auction 1.0. From the point of view of efficiency, the auction can be considered a success. Wind energy has been awarded with on average 15.2% below the ceiling price and solar PV gets a very similar result, at 15.3%.

Table 25: First RenovAR auction prices (US$/ MWh). Source: Own elaboration.

Minimum Average Ceiling Wind 49.1 59.4 82.0 Solar PV 59.0 59.7 90.0 Biomass 110.0 114.6 110.0 Biogas 118.0 177.8 160.0 SHP 111.1 114.5 105.0

At the end of the first RenovAR auction, the government announced a new tender for both non-compliant and non-awarded projects, this second round was called RenovAR 1.5 auction. To bid, projects had to have grid access. No changes were allowed in the technical proposals already qualified in round 1.0. The average price for round 1.0 was set as the ceiling price in the this second round: for wind technology 59.39 US$ /MWh and for solar PV 59.75 US$/ MWh.

The results of the RenovAR 1.5 were announced on November 25, 2016, 10 wind projects totaling 765.4 MW were awarded with an average price of 53.34 US$/ MWh. For the production of electricity from solar PV, 20 projects with a capacity of 516 MW and an average price of 54.94 US$/ MWh were awarded.

4. Renewable Energy Auctions Systems: Discussion and Recommendations

4.1. Discussion

One of the major challenges governments are facing is the adaptation of their support mechanisms to rapidly changing conditions. In the case of auctions, it is very important to continuously evaluate and adapt their design depending on the results and the new market conditions.

Regarding the adaptation of the design, renewable energy auctions in the LAC region show a clear tendency towards sophistication and refinement of the various design options to achieve a range of objectives. Examples of this sophistication are, the introduction of factors that recognise the differing value of energy produced in different geographical locations and at different times; or of penalty mechanisms that take the variability of renewable resources into account, minimising the financial risk arising from deviations from contractual production.

Two key parameters are analyzed to determine the performance of support systems: effectiveness and efficiency. Effectiveness is determined by the number of projects successfully implemented on the basis of the initial objectives. The (economic) efficiency analyzes the cost at which the objectives have been achieved.

Auctions have drawn criticism because of their effectiveness. Due to the high degree of competition, underbidding is a risk, that ultimately lead to projects not being implemented. In this respect, there are three important aspects in the design of the auction: financial guarantees, a certain degree of project development achieved, and technical and financial capacity and competence of the bidder.

Comparison of auctions for different technologies should be done with great care. However, with a view to efficiency, the analysis of the case studies suggests that auctions have been more successful for those renewable energy technologies for which projects are easier to develop, and which can be better standardized, such as wind and especially solar PV projects.

The experiences of Brazil and Uruguay demonstrate that the implementation of auctions has reduced the prices of renewable technologies. For the LAC region, auctions have achieved very low prices: for wind projects US$ 37.8/ MWh and US$ 43.0/ MWh in recent auctions in Peru and Mexico respectively, and US$ 35.0/ MWh in Mexico and US$ 47.9/ MWh in Peru for the lowest bids for solar PV projects.

These reductions of the prices are supported by technological progress, local supply chain development, high quality of resources, reduction of financing costs and the increasing maturity of the sector. However, the aforementioned auctions were carried out very recently and it remains to be seen if the projects will be implemented as planned.

4.2. Recommendations

As mentioned before, the auction mechanism brings implicitly with it the obligation for companies to compete, and it achieves efficient results in terms of cost. Auctions are therefore rather designed to promote maximum participation and competition. Based on the case studies, Table 26 summarizes recommendations for the different design options.

Table 26: Recommendations for the design of renewable energy auctions. Source: Own elaboration.

Design elements Description

RE Objectives The existence of renewable energy (RE) targets is a key aspect for the confidence of the project developers, which can be found in all the case studies analysed. Ideally RE targets should be ambitious but realistic, detailed by technology, formally linked to auctions and with well-known review and updating process.

While the renewable energy industry notes that it is important to publish a multiannual calendar with dates of auctions and volumes to be auctioned (Solar Power Europe 2016), this is a very ambitious exercise. Having a regularity, and announcing the auction well in advance to give time to prepare a competitive offer, appear to be sufficient and necessary conditions to promote competition.

Design elements Description

development, etc., it is possible to identify specific sites for the projects or, most commonly, to do a zoning exercise with quotas.

Sealed-bid is simple to implement, is the most popular and has given Type of auction optimum results.

To promote the maximum publicity at international level of the calls. Information and transparency Include the maximum amount of information in the bidding documents. Sufficient time for project developers to submit questions and demand clarifications. If possible organize public information days. Transparency portals, with all information from past and ongoing auctions, are required. Facilitating access to information on administrative procedures and on the transmission system, reduces the cost of preparing the bid. In cases where resource maps were given, as in Uruguay and other international experiences, it has favoured competition and the presentation of better and more developed projects and, therefore, more bankable.

“Pay as bid” is recommended. Establishing the final price

They are needed to avoid unexpected costs. Ceiling prices

Design elements Description

Ceiling prices have two issues: their calculation and if they should be disclosed. There is currently sufficient reliable information on renewables costs to calculate the ceiling price sufficiently accurate. In any case, it is always possible to implement an initial phase with a descending auction to "discover" the price (Brazil). With regard to its disclosure it is more convenient not to publish ceiling prices.

Design elements Description

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5. Bibliography

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Cunha Gabriel, Barroso Luiz, and Bezerra Bernardo. "Lessons learned from the auction- based approach to integrate wind generation in the Brazilian electricity market." Council on Large Electric Systems. CIGRE, 2014. del Río, Pablo. Implementation of Auctions for Renewable Energy Support in Spain: a Case Study. EU Horizon 2020 program, 2016. del Río, Pablo. Implementation of Auctions for Renewable Energy Support in Spain: a Case Study. EU Horizon 2020 program, 2016. del Rio, Pablo, and Pedro Linares. "Rethinking auctions for renewable electricity support." Renewable and Sustainable Energy Review, no. 35, 2015: 42-56. del Río, Pablo, Marie-Christin Haufe, Fabian Wigan, and Simone Steinhilber. Overview of Design Elements for RES-E Auctions. EU Horizon 2020, 2015.

Diaz Lopez, Blanca. PV-Magazine. August 31, 2015. http://www.pv- magazine.com/news/details/beitrag/brazil--auction-delivers-over-800-mw-of- pv-at-8-cents-kwh_100020875/ (accessed December 6, 2016).

Donoso, José. "Las subastas en Brasil, ¿un ejemplo a exportar?" Energías Renovables, 2012: Nº 141 20-25.

Elizondo, Gabriela, Luiz Barroso, Ashish Khanna, Xiaodong Wang, Yun Wu, and Gabriel Cunha. Performance of Renewable Energy Auctions. Experience in Brazil, China and India. World Bank Group, 2014.

EY. Renewable Energy Country Attractiveness Index. Issue 48. Ernst & Young, 2016.

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Förster, Sonja, and Ana Amazo. "Auctions for Renewable Support in Brazil: Instruments and lessons learnt." 2016.

FS-UNEP. Global Trends in Renewable Energy Investment 2016. Frankfurt am Main: Frankfurt School-UNEP Centre/BNEF, 2016.

IADB. Energy dossier: Brazil. Technical note nº IDA-TN-1121, Inter-American Development Bank, 2016.

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IRENA. "Renewable Energy Auctions in Developing Countries." 2013.

IRENA. Renewable Energy Market Analysis: Latin America. Abu Dhabi: IRENA, 2016.

IRENA, CEM. "Renewable Energy Auctions - A Guide to Design." 2015.

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OECD. "Overcoming Barriers to International Investment in Clean Energy." 2015.

OECD. Overcoming Barriers to International Investment in Clean Energy. París: OECD, 2015.

Porrua, Fernando, Bernardo Bezerra, Luiz Barroso, Priscila Lino, Francisco Ralston, and Mario Pereira. "Wind Power Insertion through Energy Auctions in Brazil." Institute of Electrical and Electronics Engineers, 2010.

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Annex I: Institutional framewok, Brazil

Table 27: Institutional framework of the Brazilian electricity sector. Source: Own elaboration.

Institution Year Competences Link

National Electric Energy 1996 • Regulate and supervise the generation, transmission, http://www.aneel.gov.br Agency (ANEEL) distribution and commercialization of electrcity. • Respond to complaints from agents and consumers. • Mediate in conflicts of interest between agents in the electricity sector, and between them and consumers. • Grant, permit and authorize energy facilities and services. • Guarantee fair fees. • Guarantee the quality of the service. • Demand investments. • Stimulate competition between operators. • Ensure universal service. Chamber of 2004 • Implement and disseminate electricity trading rules and http://www.ccee.org.br Commercialization of procedures. Electricity (CCEE) • Manage ACR and ACL contracts. • Maintain records of electricity generated and consumed data. • Carry out auctions in ACR, by delegation of ANEEL. • Carry out reserve power auctions and make the financial settlement of the amounts contracted in these auctions. Centrais Elétricas 1962 Public company created for the purpose of promoting studies, http://www.eletrobras.com Brasileiras S.A. (Eletrobras) construction and operation projects for power plants, transmission lines and substations for the country's electricity supply. Following the liberalization of the electricity sector,

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Institution Year Competences Link

Eletrobras controls 38% of the total, and transmission. In addition, it operates in the distribution sector. Center of Investigation 1974 Linked to Eletrobras, it is an advanced infrastructure for applied http://www.cepel.br Electricity (CEPEL) research in electrical systems and equipment, aiming to design technological solutions specifically oriented to the generation, transmission, distribution and commercialization of electric energy in Brazil. Electricity Sector 2004 • Evaluate the conditions of supply and provision of services in http://www.mme.gov.br/we Monitoring Committee the generation, transmission, distribution, commercialization, b/guest/conselhos-e- (CMSE) import and export of electricity, natural gas, oil and its comites/cmse derivatives. • Identify technical, environmental, commercial, institutional and other difficulties and obstacles that affect or may affect the regularity and security of supply and service. • Prepare proposals for adjustments, solutions and recommendations for preventive or restorative actions for observed situations, directing them to the CNPE. National Council for 1997 • Promote the rational use of energy resources in the country. http://www.mme.gov.br/we Energy Policy (CNPE) • Ensure the supply of energy inputs to remote or difficult b/guest/conselhos-e- access areas. comites/cnpe • Periodic review of the energy matrix. • Suggest the adoption of the necessary measures to guarantee the fulfillment of the national electricity demand, taking into account the long, medium and short term planning. National Water Resources 1998 • Examine proposals for amendments to legislation on water http://www.cnrh.gov.br/ Council (CNRH) resources. • Arbitrating conflicts over water resources. • Decide on projects for the use of water resources whose repercussions go beyond the reach of the states in which they will be implemented.

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Institution Year Competences Link

• Establish the general criteria for granting the right to use water resources and cargo for their use. • Approve the National Water Resources Plan and monitor its implementation. Energy Research 2004 Provide services in the area of studies and research to support http://www.epe.gov.br Company (EPE) planning of the energy sector, such as electricity, oil and natural gas and its by-products, coal, renewable energy sources and energy efficiency. Brazilian Institute of 1989 Under the Ministry of the Environment (MMA), it is responsible for http://www.ibama.gov.br/ Environment and the drafting of environmental regulations and for ensuring Renewable Resources compliance. Among its competences are the assessment of (Ibama): environmental impact assessments and the granting of environmental licenses. Ministry of Mines and An agency of the federal administration, it is a formulator of http://www.mme.gov.br/ Energy (MME) public policies, as well as inductor and supervisor of the implementation of these policies. National Power System 1998 Private non-profit entity, responsible for coordinating and http://www.ons.org.br Operator (ONS) controlling the operation of the power generation and transmission facilities in the SIN, under the supervision and regulation of ANEEL. Secretariat of Electricity Its mission is to coordinate, guide and control the actions of the http://www.mme.gov.br/we (SEE) MME in relation to the policies of the electricity sector, in order b/guest/secretarias/energia to guarantee the supply to all the consumers of the country, with -eletrica/pagina-inicial the adequate performance of the operation of the electrical system under the quality requirements, continuity and security of operation and fair tariffs for society, and to stimulate investment, taking into account the premises of social and environmental sustainability, social inclusion and national energy integration and with neighboring countries.

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Annex II: Institutional framewok, Panama

Table 28: Institutional framework of the Panamanian electricity sector. Source: Own elaboration.

Name Description Link

National Entity of the Executive Body in charge of energy policies, whose mission is to www.energia.gob.pa Secretariat of formulate, propose and promote the national energy policy. Established by Law 43 Energy (SEN) of April 25th, 2011. It is attached to the Ministry of the Presidency.

Public Services The Public Services Regulatory Authority (ASEP) established by Law 26 of 1996 and www.asep.gob.pa Authority (ASEP) its amendments, regulates and supervises the electricity, telecommunications, water and sewer sectors. Empresa de Company dedicated to the transmission of electric energy, whose 100% of the www.etesa.com.pa Transmisión shares belongs to the State. It is currently in charge of conducting electric power Eléctrica S.A. auctions. (ETESA) Ministry of Ministry responsible for everything related to the environment. Responsible for the www.miambiente.gob.pa Environment approval of environmental impact studies for any project. National Dispatch Center responsible for the dispatch of electricity, electricity market transactions, as www.cnd.com.pa Center (CND) well as the real-time operation of the system. It is a dependency of the ETESA. Office of Rural Organization dependent on the Executive Branch, in charge of promoting the www.oer.gob.pa Electrification electrification of rural areas not served, unprofitable and not concessioned. (OER) Generation Since the electric system was privatized in 1997, there are now more than 46 companies generation companies and many others in the process of obtaining licenses and concessions for electricity generation projects. Of the generation agents, only the generation companies from the Institute of Hydraulic Resources and Electrification (IRHE) have mixed capital, in which the State was left with a stock remaining, and a company with 100% state capital that is EGESA.

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Name Description Link

Distribution In charge of the distribution and commercialization of electrcity in its concession companies area. The distribution companies are 3: EDEMET, EDECHI and ENSA. Each of them responds to a geographic area that is concessioned and does not compete with each other. The companies EDEMET and EDECHI belong to the group Gas Natural Fenosa and the company ENSA to Empresas Públicas de Medellín. Large clients Consumers whose demand is greater than 100 kW and have requested such figure. They can carry out energy purchase transactions on the spot, as well as direct contracting with producer agents. Currently there is no large participation, the consumption of all of them is approximately 3% of the total generation. Self-generators Participants of the electric market that has said figure and can carry out and cogenerators transactions of purchase and sale of energy in the spot, as well as make direct contracting with other agents.

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Annex III: Institutional framewok, Uruguay

Table 29: Institutional framework of the Uruguayan electricity sector. Source: Own elaboration.

Name Description Link

Ministry of Within the MIEM, the DNE is the unit responsible for developing, proposing and www.miem.gub.uy Industry Energy coordinating policies aimed at meeting national energy needs, at appropriate and Mining costs for all social sectors and contributing to the country's competitiveness, www.dne.gub.uy (MIEM) and promoting rational and efficient energy consumption habits, seeking the energy National Energy independence of the country in a framework of regional integration, through Directorate (DNE) sustainable solutions both economically and environmentally, using energy policy as an instrument to develop productive capacities and promote social integration. Regulatory Unit for State institution, created to defend users, and contribute to the development of the www.ursea.gub.uy Energy and Water country, through regulation, control and advice in the energy, fuel and water Services (URSEA) sectors. In recent years, the regulation of activities related to the efficient use of energy, the safety of electrical products, the use of solar thermal energy and the use of steam generators has been added to this regulation. National Vertically integrated public company, owned by the Uruguayan State, which portal.ute.com.uy Administration of engages in generation, transmission, distribution and commercialization of Power Plants and electricity, provision of advisory services and consultancy. Transmission (UTE) Electric Market Public non-state person, created by Article 4 of Law 16,832 of June 17th, 1997, www.adme.com.uy Administration which establishes a new legal regulatory framework for the national electricity (ADME) system. ADME operates and manages the wholesale electricity market (MMEE). It performs the technical dispatch of the SIN, in accordance with the rules established by the Executive Branch.

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