Deconstructing the €1.20/MWh of the solar energy auction of Portugal

AleaSoft, September 2, 2020. On August 24, the news broke that a record price of €1.20/MWh had been achieved in the photovoltaic energy auction of Portugal. This analysis aims to clarify the terms of the auction and correctly interpret this result of €1.20/MWh. To do this, it will be necessary to understand the flexibility offered by the energy storage, the importance of the connection points to the grid and the long‑term profitability of the new photovoltaic installations.

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The news published by the Portuguese newspaper Expresso about the new price record of €1.20/MWh reached in the solar energy auction in Portugal caused a great impact. It is no wonder, since this price is about €10/MWh less than the previous world record. Among the obvious questions that everyone is trying to answer since then are: Is someone really offering that price for a photovoltaic power plant? Is that price profitable in the long term? How is that value of €1.20/MWh obtained?

Now, a week after the auction took place and after analysing the available information quietly, an attempt will be made to explain how this value of €1.20/MWh is obtained and how it is possible for a photovoltaic energy facility to be profitable with those prices. To do this, first of all, it is necessary to understand the mechanism of the auction and be clear about the three remuneration modalities for which the participants in this second solar energy auction of Portugal could opt.

The second solar energy auction of Portugal

This second solar energy auction of Portugal took place between August 24 and 25 and consisted of 12 lots totalling 700 MW in the Alentejo and Algarve regions. One of the peculiarities of this auction is that each bidder could choose one of the three available remuneration modalities: fixed remuneration for the sold energy, fixed compensation to the electricity system and fixed remuneration for facilities with storage.

The first modality, labelled as a variable premium for differences, consists of receiving a fixed price for the generated energy. The facility sells the energy directly to the market and then the excess or deficit with respect to the fixed price is offset by a contract for difference. For this type of remuneration, the participants offered a percentage discount on a specific reference price expressed in €/MWh.

In the second modality, fixed compensation to the National Electricity System, the participants make a contribution offer in €/MW/year to be paid to have a reserve of capacity at a connection point of the electricity grid, and can sell the energy in the market.

The last modality, fixed premium for the flexibility, is reserved and is the only one possible for solar installations that incorporate an energy storage system. In this case, the installation receives an annual compensation (€/MW/year) and can sell the photovoltaic energy in the market, but paying an insurance against price spikes, that is, an insurance to compensate the system when the market prices exceed a certain threshold. For this modality, the offer is made as a percentage discount on a certain reference compensation rate expressed in €/MW/year.

The objective of the auction is awarding the reserve of energy injection capacity from solar technology at certain connection points to the transmission and distribution grid. As it will be seen, this is one of the key points when it comes to understanding the low prices achieved in this auction.

The results of the auction

As it was seen, there are three types of remuneration that participants can choose and all of them compete together in each of the lots. To order and value the bids regardless of the chosen option, all bids are converted to the net present value expressed in €/MW of the 15 years in which the winning installations will be subject to the remuneration regime chosen in the auction.

The net present value (NPV) is a financial term that determines the current value of the income and the expenses during a certain period in the future. To determine the NPV of each offer, the auction computer platform starts from the offered price, either in €/MWh or in €/MW/year, from the expected price of the wholesale market, from the equivalent annual hours of the photovoltaic installations, from the estimated captured price of the photovoltaic energy, from an estimated inflation rate, from the estimated number of hours with a price above a certain value and other concepts that may affect the value of the income and expenses during the 15 years that the installations will be subject to the chosen remuneration scheme.

Thus, the published result of €1.20/MWh is not an offer made for this value, but rather an estimate of the average remuneration that the winning facility could receive, assuming the market price, the captured price, the inflation rate, etc. that was seen before. Therefore, the remuneration that the facility will finally receive can vary significantly.

According to the news from the Expresso, the facility was covered by the remuneration modality for facilities with storage, so its offer was a discount percentage on an annual reference capacity premium, which was €33 500/MW/year. According to the press release of the Portuguese Government, in this modality the offers exceeded 200% discount, that is, the premium becomes negative, so the facilities will pay an average premium of €37 100/MW/year, according to the note.

Returning to the winning bid of €1.20/MWh, this is the average price that the facility will receive after selling the energy to the market, paying the capacity premium and the insurance for price peaks, all of this assuming the prices captured up to 2039 that were used for the calculation, as seen. However, taking into account that it is a facility with storage, the strategic use that will be made of the stored energy will greatly exceed the prices that the solar energy sold directly to the market can obtain. Hence, these so low prices can be allowed.

It is also important to bear in mind that, once elapsed the 15 years during which the facility will be subject to the auction remuneration regime, the facility will be able to continue operating, will have greater profitability and will have one of the most important and expensive aspects: a connection point to the saturated Portuguese grid, since, right now, the only way to access a connection point is through an auction. This is another key to understanding the staggeringly low results of this auction: the profitability of the long‑term projects. With the improvements in photovoltaic technology and given the uncertainties of the markets in the medium term, there is an increasing commitment to long‑term renewable energy projects. At AleaSoft, 30‑year market price forecasting is available for the main European energy markets, which is essential to analyse the profitability of the projects on that horizon. The reports and forecasting are constantly updated with the latest information.

Source: AleaSoft Energy Forecasting.

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