Renewable energy auctions are also known as “demand auctions” or “procurement auctions”, whereby the government issues a call for tenders to install a certain capacity of renewable energy-based electricity. Project developers who participate in the auction submit a bid with a price per unit of electricity at which they are able to realise the project. The government evaluates the offers on the basis of the price and other criteria and signs a power purchasing agreement with the successful bidder.
Renewable energy auctions, despite some difficulties in implementation in the past, have become a popular policy tool in recent years. The number of countries that adopted renewable energy auctions increased from 9 in 2009 to at least 44 by early 2013, out of which 30 were developing countries. The renewed interest in auction schemes is driven by their potential to achieve deployment in a cost-efficient and regulated manner. Auction schemes have benefited from the rapidly decreasing costs of renewable energy technologies, the increased number of project developers, their international exposure and know-how, and the considerable policy-design experience acquired over the last decade. When well designed, the price competition inherent to the auction scheme increases cost efficiency and allows price discovery of renewable energy-based electricity, avoiding potential windfall profits and underpayments. While auctions have become very attractive, they only benefit the successful bidders and tend to favour large players that are able to afford the associated administrative and transaction costs.
The findings of this study indicate that in designing and implementing auction schemes, policy makers may want to consider the following:
- Type of auction: the sealed-bid auction is simple, easy to implement, fosters competition and avoids collusion. Descending clock auctions are more difficult to implement, but they allow for a fast price discovery as well as greater transparency.
- Ceiling prices should not be disclosed to the bidders in order to ensure greater competition.
- Auction volumes must be determined in relation to the capacity of the market to deliver, particularly in markets with a limited number of local renewable energy developers and suppliers. Determining the optimal number of rounds and the volumes that would create greater competition is a challenge that requires learning by doing.
- Streamlined administrative procedures, with communication and transparency provided equally to all bidders, are essential to the success of an auction scheme.
- Strong guarantees and penalties are essential to the success of auction schemes, preventing potential underbidding and minimising the risk of project delays and completion failure.