Designing Auctions for Specific Objectives

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Energy auctions can lower prices while advancing specific country development and policy goals. Good auction design is tailored to national policy objectives, market conditions, and institutional capacities.
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Energy auctions can lower prices while advancing specific country development and policy goals. Good auction design is tailored to national policy objectives, market conditions, and institutional capacities.

Policymakers have many objectives for auctions such as promoting private sector investment and socioeconomic progress. Adapting the auction design to local framework conditions and priorities is one of the key steps to ensure success in achieving auction policy objectives. Good auction design can enable policymakers to advance many objectives, including reaching renewable energy targets, lowering generation costs, supporting the integration of renewable energy, and creating local jobs. Good auction design also mitigates risks to all parties and reduces the chance of project construction delays, non-completion, and underperformance during the operation phase.

In the design process, designers determine the auction rules, which need to be transparent and well understood by both auctioning authorities and bidders. Countries have chosen different entities as auctioneers, including the energy regulator (Germany), the electricity market operator (Mexico, Colombia, Brazil), and dedicated agencies (Morocco, India). South Africa decided that its auction program would be run by a dedicated agency rather than the public utility that was historically responsible for procurement. The agency is staffed by employees of the ministries of energy and finance, who are experienced in working with private sector and public-private partnerships.

During the auction design process, government stakeholders (e.g., policymakers, utilities, regulators, and market operators) determine priorities, adapt them to the local market, define the regulatory framework and institutional capabilities, decide on the optimal auction design, implement an auction under clear rules that attract competition, and evaluate (and if necessary adjust) the auction design based on lessons learned.

Balancing Low Prices with Other Policy Objectives

Recognizing the trade-offs between policy objectives is an integral part of the auction design process. Therefore, it is important to map trade-offs and agree on the prioritization of policy objectives and then ensure they are adequately reflected in the auction design. For example, a design that does not have any restrictions on the technologies that the bidder can propose promotes efficiency by awarding technologies with the lowest generation costs. In contrast, a design with more restrictions in terms of location, time, dispatchability, etc. will have a higher value to the overall system but is likely to increase the bid price. The bid price could also increase by integrating local priorities, such as the local sourcing of components used, hiring of local workforce, or the sharing of project ownership with the community.

Auctions Stages

During early experiences with auctions, countries focused on meeting renewable energy targets as the policy objective and minimizing generation costs. Auction designers demonstrated market interest by issuing the tender and began the process of price discovery. They awarded projects with the lowest tariff per unit of electricity generated.

As auction programs mature and the share of variable renewable energy (VRE) in power systems increases, many countries find that grid integration concerns become a real barrier to scaling up renewable energy. Countries’ objectives then evolve to enhancing dispatchability and improving the value of renewable energy. The concept of system value goes beyond considering only the power generation costs of an awarded project. It must also consider a generation technology’s effectiveness at reducing relative system costs for electricity supply.

Overview of the Auction Process

  1. Target Definition
    • Policy objectives
    • Institutional capabilities
  2. Market and Regulatory Analysis
    • Market size
    • Predeveloped projects
    • Market players
    • Technology cost
    • Project development and operation
    • Existing regulations and incentives
  3. Procurement Design
    • Institutional setup
    • General design elements
    • Procurement procedure
    • Conditions for participation
    • Deadlines and penalties
  4. Implementation
    • Drafting of required documents
    • Market building
    • Procurement conduction
      • Request for quote
      • Request for proposal and awarding of bids
    • Contracting
    • Monitoring of realization
  5. Evaluation
    • Lessons learned
    • Adjustment of procurement design

Resources

  • Guide

    Designing Renewable Energy Auctions: A Policymaker’s Guide

    The Policymaker’s Guide introduces key auction design concepts for energy ministries, utilities, regulators, and other stakeholders who make decisions on the design of renewable energy auctions. Read the guide

  • Fact Sheet

    Auction Design Process

    The auction design process allows policymakers to align policy objectives early and tailor the auction to policy objectives, level of market readiness, and institutional capabilities. Read the fact sheet

  • Fact Sheet

    Prequalification Requirements and Ceiling Prices

    Policymakers must carefully select and balance conditions, such as qualification requirements and ceiling prices, that bidders must comply with to participate in a renewable energy auction. Read the fact sheet

  • Fact Sheet

    Setting Financial Guarantees and Penalties

    Penalties, backed by financial guarantees, can help mitigate risks by ensuring the seriousness of bids and reducing the chance of project delays, non-completion, and underperformance during the operation phase. Read the fact sheet

  • Fact Sheet

    Important Features of Bankable Power Purchase Agreements

    There are ten important features in a bankable power purchase agreement that will help address and mitigate risks to the power purchase producer’s ability to pay off its lenders. Read the fact sheet

Last updated: July 20, 2020

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