Iberdrola, Naturgy and Endesa fear that Forestalia, Capital Energy and other new entrants will launch reckless bids in the auction of 3,000 megawatts of renewables that starts tomorrow.
The auction that the government will hold tomorrow to grant new renewable licences – the first after a four-year hiatus in this type of bidding – has unleashed expectations in the sector. And also tension.
Huge participation is expected in the process, both from the big energy companies, such as Endesa, Iberdrola, Naturgy, Repsol and Acciona, and from new entrants, such as Forestalia, Capital Energy and Everwood, to name but a few.
The problem is that the anxiety of some to position themselves in the sector could lead to the presentation of reckless bids, with rock-bottom prices that not only break this and other auctions, but also condition the rest of the market.
The pressure is enormous. Added to the race for low bids is the government’s desire to encourage them. The Ministry of Ecological Transition, headed by Teresa Ribera, wants to carry out an auction with spectacular results. Ribera has been subjected to enormous criticism in recent weeks for not tackling the price hike in electricity prices caused by the cold snap and snow caused by the Filomena storm.
Now, more than ever, the minister, who has had no shortage of criticism from within her own government, has the extreme need to present measures to the public, such as the auction, with which she can publicly say that electricity prices are already going to fall. And what’s more, they will do so thanks to renewables.
The auction is sure to lower prices. The problem is that it could be a mirage that covers up the start of other problems. Prices could fall so much and so suddenly that the whole market becomes unbalanced, not just the daily wholesale market, or pool. Also long-term bilateral contracts. That is, the so-called PPAs, which are signed between large electricity companies or electricity producers and consumer companies.
Some sources comment that there are companies that are considering presenting themselves tomorrow with offers of around 20 euros per megawatt for photovoltaic and no more than 30 euros for wind power.
This would cause a cataclysm in the sector. These prices are far below those being negotiated in electricity delivery contracts on the futures market, which are around 45-50 euros from 2022, when the new renewable plants are supposed to be operational. They would also be well below the 32-35 euros per megawatt at which PPA contracts for photovoltaics are being concluded, or the more than 37 euros per megawatt for wind power in these PPA contracts.
Only unrestrained aggressiveness in bidding would explain these prices, which, in any case, would be the packaging of extremely high-risk offers based on two financial assumptions that might not come true: that the cost of the installations will continue to fall exponentially and that of financing will also fall exponentially. Only the conviction that the cost of both parameters will be much lower in the future than at present would explain why bids are currently being submitted “at a loss”, even lower than the best PPAs on the market. It is precisely the PPAs that are setting the limits, and if they are broken, the market will be disrupted. This is what the electricity companies fear.
They have more power than other groups to sign PPAs. And they are doing so at relatively comfortable prices. If tomorrow’s auction punctures these levels downwards, it could set a precedent and condition PPAs from now on. For this reason, even if the large electricity companies do not bid eagerly in the auction, they will be watching their results with a sidelong glance, because from tomorrow onwards nothing will be the same.