The growing role of non-price criteria in offshore wind auctions

An increasing number of EU member states are adopting non-price criteria in their offshore wind auction designs, write Vasilios Anatolitis, Julia Panny, Malte Gephart, and Pia Weckenbrock. But while non-price criteria can support a wide range of policy objectives, their design and implementation come with challenges, they caution.

Vasilios Anatolitis and Julia Panny are experts at the Fraunhofer Institute for Systems and Innovation Research, one of the leading innovation and energy research institutes in Europe. Malte Gephart and Pia Weckenbrock are experts with Guidehouse, a global management consultancy advising energy providers, corporations, and the public sector.

In the past, renewable energy auctions primarily focused on price discovery and minimising support costs.

However, there is a growing trend of leveraging auctions to achieve additional policy objectives, encompassing environmental, social or resilience aspects. This can be done via the introduction of non-price criteria (also called qualitative criteria).

Already now, an increasing number of EU Member States – such as the Netherlands, Germany, and France – are using non-price criteria in their auctions, especially for offshore wind. Belgium and Norway plan to do so in the near future.

Recent discussions around the Net-Zero Industry Act (NZIA), the proposal for an Electricity Market Design (EMD) reform, and the European Wind Power Package have made it abundantly clear that non-price criteria in renewables auctions are high up on the political agenda.

Proposed by the Commission in spring 2023 and backed by the Parliament in November 2023, the NZIA calls on member states to implement non-price criteria, mainly referring to sustainability and resilience, in their renewable energy auctions with a weight between 15% and 30% (based on the Commission’s proposal) or even 35% to 50% (based on the Parliament’s proposal).

If adopted, the Commission will provide details on how to design and implement such criteria in specific guidance.

Non-price criteria are also a key element of the Wind Power Action Plan announced by the Commission in October 2023. Therein, member states are called upon to include “objective, transparent and non-discriminatory qualitative criteria” into their auctions and the Commission is ready to deliver an Implementing Act to harmonise auction design throughout the EU in this regard.

So, it seems like non-price criteria are here to stay. Against this background, we examine their potential benefits and challenges.

The promise: Goals of non-price criteria

There is a wide array of non-price criteria, spanning across various policy domains, that member states can consider for their auctions.

A prominent category revolves around environmental and sustainability considerations, including for instance environmental footprinting, circularity, or greenhouse gas emissions intensity of certain processes or components.

Member states also consider energy system and market integration criteria, mandating projects to demonstrate how they facilitate the incorporation of renewable electricity into the market or grid. This may involve mechanisms such as power purchase agreements (PPAs), alternative ownership structures, or flexibility measures.

Another category of non-price criteria is innovativeness, which encompasses factors like engagement in research and development activities, the adoption of novel technologies and approaches, or the facilitation of technology transfer.

Policymakers may also consider adopting socio-economic criteria, relating for example to evaluating the creation of benefits for stakeholders and consumers, as well as promoting benefit-sharing.

Lastly, non-price criteria can be related to industrial policy, such as supply chain engagement and domestic economic development.

The challenge: Implementation

While non-price criteria can support a wide range of policy objectives, their design and implementation come with challenges. A proper design process can help to avoid that non-price criteria may result in (unexpected) cost increase, reduction of competition in the auction, or legal uncertainty around the auction results.

First, it is crucial to identify the most appropriate implementation mode of non-price criteria: as prequalification criteria with a price-based selection process, as award criteria without a minimum requirement, or as award criteria with a minimum requirement. While prequalification criteria set the minimum standards for bidders to be able to participate in the auction, award criteria incentivise a higher performance regarding the desired policy objectives and allow a ranking of bids.

When designing award criteria, it is important not to make them too general or inclusive as they crucially need to allow for precise differentiation between projects. Moreover, if industry standards have already been established for a certain non-price criterion, it should no longer serve as an award criterion but instead be used as a prequalification criterion. Also, the maturity of the market in question, as well as the expected level of competition in the auctions, need to be taken into account when choosing non-price criteria.

Furthermore, non-price criteria need to be operationalised in a way to allow for precise and unequivocal evaluation of projects. Policymakers need to translate pursued policy objectives into specific indicators that measure quality, track progress, and ensure fairness and comparability during project selection and implementation. They also need to design a clear and transparent scoring method to facilitate efficient auction outcomes and improve the legal robustness of auction results.

Limits and opportunities to learn

While non-price criteria offer new opportunities to evaluate and value the impacts of renewables projects more comprehensively, they cannot replace dedicated policies targeting policy objectives such as environmental protection, energy system and market integration and the likes.

Before including non-price criteria in renewables auctions, one needs to ask whether the auction is indeed the best place to accomplish said objective. In some cases, a specific objective might be reached more appropriately through a separate or flanking policy instrument, outside of the auction.

As the policy landscape undergoes rapid transformation and non-price criteria are gaining importance, a gradual roll-out of non-price criteria may offer an opportunity for policymakers, bidders, and implementing bodies to gather valuable experiences and distill best practices. Additionally, the exchange of good practices among countries that have already integrated non-price criteria into their auction designs can expedite the learning process. An excellent example facilitating such knowledge exchange is the North Seas Energy Cooperation (NSEC).