Introduction to Renewable Energy Auctions

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When utilized strategically, reverse auctions can facilitate competitive renewable energy price setting, lower costs, expand access to affordable and sustainable energy, and increase transparency of energy procurement.
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When utilized strategically, reverse auctions can facilitate competitive renewable energy price setting, lower costs, expand access to affordable and sustainable energy, and increase transparency of energy procurement.

An auction is a competitive process for policymakers to procure electricity generated by renewable energy. Policymakers can hold auctions regardless of market maturity and institutional capacities and can choose different entities to conduct auctions. An auctioneer can be an energy regulator, electricity market operator, or dedicated agency. The auctioneer issues a tender with clear rules in an online or other public platform, which ensures a transparent and competitive procurement process.

By 2019, 109 countries around the world had held auctions, up from 98 in 2018. Countries have chosen different entities as auctioneers. In the case of Germany and Senegal, the auctioneer was the energy regulator. In Brazil, Colombia, and Mexico, the auctioneer was the electricity market operator. In Morocco and South Africa, the auctioneer was a dedicated agency.

What is a renewable energy auction? (04:05)

, VIDEO – This video explains renewable energy auctions and why policymakers are using it as a policy tool to combat the climate crisis and lower energy costs. Read more

Auctions versus other Procurement Mechanisms

The three most common price-setting methods for procuring electricity from renewable energy are feed-in tariffs, negotiated tenders, and auctions.

Unlike negotiated tenders and feed-in tariffs, auctions have the potential to provide price discovery, reduce windfall profits for power producers, and lower electricity prices for cash-strapped utilities and consumers by forcing companies to compete against one another on price. In addition, auctions allow greater volume control and more market-reflective, competitive pricing than feed-in tariffs. They also scale more easily and enable faster project execution compared with negotiated tenders.

Auction Advantages

  • Provides greater volume control
  • Results in more competitive pricing due to elimination of post-bidding negotiations
  • Enables faster project execution after award
  • Facilitates scaling up for multiple projects and rounds
  • Offers high levels of transparency in the award rules and selection process

Auction Disadvantages

  • Requires sufficient competition
  • Requires stronger institutional capabilities than other procurement mechanisms
  • Imposes risk on bidders who face loss of project predevelopment costs if not awarded
  • Entails risk of underbidding and project noncompletion

Preparing for Auctions

For countries with limited market maturity and institutional capacities, it is important to design simple auctions. However, more complex auctions can better react to different policy preferences and market conditions.

Before designing an auction, policymakers should define policy objectives to be achieved with the auction. Two of the most common policy goals of auctions are allocating available funding efficiently and achieving renewable energy generation targets through the timely implementation of projects. Other policy goals include grid and system integration of awarded projects and positive socioeconomic effects at the local level.

Auction designers should also know the market, project development cycles, and available institutional capacities to adequately distribute risk between renewable energy producers and the public.

Resources

, FACT SHEET – Renewable energy auctions allow policymakers to procure clean energy at competitive prices by assisting in price discovery and reducing windfall profits for power producers.

, 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.

, FACT SHEET – Following 800 renewable energy auctions in 61 countries, it is now possible to identify some common stages of design and implementation that auction programs move through as they mature.

For More Information

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Auctions are best practice for procuring least-cost energy. This competitive, transparent process helps countries meet their energy and climate goals and attract investment into their clean energy futures.
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TOOLKIT – Auctions are best practice for procuring least-cost energy. This competitive, transparent process helps countries meet their energy and climate goals and attract investment into their clean energy futures.

In today’s rapidly evolving renewable energy marketplace, it can be challenging to keep track of current best practices in renewable energy policy, innovations, and market trends. USAID developed the Renewable Energy Auction Toolkit to help international development professionals, energy ministries, utilities, policymakers, and regulators to design and successfully implement energy auctions that expand access to affordable and sustainable clean energy.

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Through the Scaling Up Renewable Energy program, USAID helps partner countries power economies with renewable energy, meet international climate commitments, and open markets to private investment and competition.
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2017–ONGOING, GLOBAL – USAID’s Scaling Up Renewable Energy (SURE) program helps partner countries meet bold climate commitments by accelerating their transition to more affordable, reliable, and accessible energy that spurs growth, powers health systems, and reduces emissions.

Through SURE, USAID provides a variety of services to help policymakers, utilities, and regulators plan, procure, and integrate renewable energy, modernize energy sectors, and create policies that enable sustainable energy markets to flourish. As more countries aim to achieve net-zero emissions by 2050 and reduce hazardous waste, SURE’s Innovation Fund supports clean energy technology, energy efficiency innovation, and a circular economy for renewable energy equipment.

Last updated: November 02, 2022

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