Designing Renewable Energy Auctions

A Policymaker’s Guide

This brief guide introduces key auction design concepts for energy ministries, utilities, regulators and others who make decisions on the design of renewable energy auctions.

Scaling Up Renewable Energy through Auctions

Renewable energy (RE) auctions are transparent and competitive mechanisms that allow policymakers to procure clean energy at prices that reflect those in the market. An important tool for achieving the goals of energy sectors across varying degrees of liberalization and maturity, auctions have the potential to establish fair prices, improve profits for power producers, and lower electricity costs for utilities and consumers. Auctions can also increase the ability of governments to steer the build-up of renewable energy capacities more precisely over time and location and help spur private investment by guaranteeing that projects will be awarded at fair prices.

Renewable Energy Procurement Mechanisms

The three most prevalent price-setting methods for procuring electricity from renewable energy—administratively-set tariffs, negotiated tenders, and auctions—have various advantages and disadvantages.

Unlike negotiated tenders or feed-in tariffs (FITs), auctions have the potential to provide price discovery, reduce windfall profits for power producers, and give cash-strapped utilities and consumers lower prices for electricity by forcing companies to compete against one another on price. Auction advantages over feed-in tariffs include greater volume control and market-reflective, competitive pricing. Their advantages over negotiated tenders include ease of scale and faster project execution due to a faster negotiation process.

Preparing and Implementing Auctions

Defining policy objectives to be achieved with the auction, as well as knowing the market, project development cycles and available institutional capacities support the design of auctions that fit the local framework conditions. This diagnosis also helps identify areas within the policy framework that need to be adapted to adequately distribute risk between renewable energy producers and the public. Key considerations include the prioritization of policy objectives, market size and readiness for renewable energy auctions, project development duration and risks of failure, efficiency of the country’s permitting processes, and whether the country’s institutional capacities meet the auction’s requirements.

The Design Process and Timing of the Auction

During the auction design process, government stakeholders (e.g., policymakers, utility, regulator, market operator) 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. Key steps of an auction design process and their timing include the drafting of required documents, preparing relevant institutions through trainings and securing sufficient funding, and building the market by engaging bidders and financial institutions.

Designing Simple Auctions

The introduction of an auction creates a market for renewable energy remuneration. The rules by which this remuneration is determined and allocated are known as design elements. They need to be transparent and well-understood by both auctioning authorities and bidders.

For countries with limited market maturity and institutional capabilities, it is important to create a simple auction design. More complex auctions can, however, better react to different policy preferences and market conditions. Key design elements can be grouped into four categories:

  1. General Design: The auction’s volume, whether it is site-specific vs. site agnostic, the technology type, and the technology size
  2. Auction Procedure: The way bids are submitted and selected during the bidding process, decisions on static vs. dynamic auctions, bid selection criteria, pricing rules, and number of rounds
  3. Conditions for Participation: The requirements bidders or projects need to meet to participate in the auction, including technical requirements, financial guarantees, and the ceiling price
  4. Deadlines and Penalties: The timeframe to build projects, and the consequences for bidders for the non-and/or delayed realization of awarded projects

Industry Trends in Auctions

As countries gain experience with auctions and the local market matures, more complex auction designs will be used to more precisely address a number of power system goals. Two auction design elements will deserve greater attention—time- and location-based incentives, and multi-technology and technology-neutral auctions.

Emerging markets are leapfrogging the developed world in the pursuit of renewable energy, expanding energy access to millions of people around the globe. Along the way, they are reinventing the national electric grid and developing the policies and institutional, regulatory and technical solutions needed to provide sustainable, reliable electricity for future generations.

USAID advances these efforts through the Scaling Up Renewable Energy (SURE) project, assisting partner countries in accessing the technical assistance needed to rapidly and effectively implement five critical interventions for scaling up renewable energy rapidly and effectively — strategic energy planning, grid integration, competitive procurement, renewable energy zones and smart incentives.

Date 
Monday, July 1, 2019 - 5:00pm

Last updated: May 06, 2020