The Basics of Competition & Auctions For Renewable Energy

This technical note from USAID’s energy specialists explains how new procurement processes work and why they are changing the renewable energy landscape.

Promoting competitive procurement of renewable energy allows USAID to rapidly scale clean energy at low prices, contributing to a country’s climate and economic development goals. Costs may be higher where utility creditworthiness can be a challenge, but tools exist to address market risk—such as guarantees and capital grants—to garner more competition.

Competitive procurement is not unique to the energy sector, and is simply defined as a method for purchasing a product or service through an open and competitive process with multiple bidders. In the electricity sector, competitive procurement refers to the purchase of an energy or capacity product through a competitive tender process. Instituting this competitive framework is central to the development of a low-cost and high-renewable electricity sector because it provides a vehicle for tendering projects transparently, builds investor confidence in the system and fosters renewable energy growth.

Reverse auctions are a type of competitive procurement in which the lowest price wins, and acts as price discovery for renewable energy plants. These auctions require that government agencies devote resources for engaging in advance planning and consultation. Energy stakeholders must also reflect upon the level of competition and capacity targets that are appropriate to the local country context.

Auctions have traditionally not played a large role in renewable capacity addition, and levels of competition vary significantly, but since 2012, the level of auction uptake has been rising. Perhaps the most exciting development is the evidence showing that low bid prices are not specific to developed countries, but that low bid prices can be replicated worldwide. The companies that have played the major roles in auctions to date tend to be larger, more established companies with the power to manufacture or source large supply orders at low cost.

USAID is at the forefront of competitive procurement design and implementation, helping developing countries strengthen national energy sectors through increased transparency and greater private sector participation.

Wednesday, November 2, 2016 - 1:30pm

Last updated: February 05, 2020