The Basics of Competition & Auctions for Renewable Energy

In the electricity sector, competitive procurement refers to the purchase of an energy or capacity product through a competitive tender process. This framework is central to the development of a low-cost and high-renewable electricity sector, providing a vehicle for tendering projects transparently, building investor confidence, and fostering renewable energy growth. The process of competitive procurement allows USAID to rapidly scale clean energy at low prices, contributing to both climate change and economic development goals. This process can help to reduce harmful greenhouse gas emissions and bring cleaner sources of energy to communities. Recent examples of competitive procurement, especially in the form of reverse auctions, have resulted in global prices that are strikingly lower than historical prices, and higher capacity factors for constructed plants. Reverse auctions are a type of competitive procurement in which the lowest price wins, as opposed to a silent auction where prices are bid up. The regulator conducts a process of pre-qualification prior to the auction to select preferred bidders. The regulator sets a certain level of capacity and/or energy that is needed at a certain price, and fills the capacity until that level is met. Auctions can be structured into multi-round programs, where each successive round establishes more confidence and pushes prices lower. The process of reverse auctions has resulted in low prices for solar and wind plants in Mexico (2.69 cents/kWh), Chile (2.91 cents/kWh), Zambia (6.02 cents/kWh), and United Arab Emirates (2.99 cents/kWh) over the past six months, often at prices comparable to natural gas. Competitive procurement acts as price discovery for renewable energy plants, allowing private sector actors to bid a plant price based on the actual costs of doing business. Brazil, India, and South Africa have seen an immediate average price cut of 29-50% following the introduction of competition through auctions. Even in more developed countries, where government capacity to set prices is quite high, the introduction of auctions has led to a decrease in feed-in tariffs. As additional auction rounds are conducted, the clearing prices of auctions have moved with the ups and downs of the economy, the energy sector, and renewable energy project development process in these countries. Reverse auctions require that government agencies devote resources for engaging in advance planning and consultation. Key stakeholders must come together to institute the requisite technical, legal, and regulatory processes prior to auction rollout. Ensuring that adequate transmission is available to interconnect new projects and that the electrical grid is ready to integrate variable renewable sources are essential to achieving successful auctions. Auctions have traditionally not played a large role in renewable capacity addition but since 2012, the level of auction uptake has been rising. Brazil, China, South Africa, and Peru have been the global leaders in auctions since 2000, procuring 12 GW, 8 GW, 5 GW, and 3 GW of renewable energy respectively through auctions. A major shift towards auctions will take place when the EU makes competitive mechanisms mandatory in 2017, with more than half of clean energy capacity additions taking place through auction policies. Reverse auctions are not infallible and must be tailored for different market conditions. Nonetheless, introducing some level of competition and transparency into the bidding process for energy contracts should be considered as one of the foundations for achieving a mature energy sector. The sealed bid auction with pay-as-bid clearing mechanism is becoming the dominant model globally, except for Brazil which has its own unique descending clock mechanism. The evidence shows that low bid prices are not specific to developed countries, but that low bid prices can be replicated worldwide. Although the data does not necessarily reflect this trend for wind, a more mature technology, the evidence for solar suggests a high correlation between price and auctions in the 16 markets surveyed, comprising 13.5 GW of solar capacity. In addition, there is no indication that project development is suffering from the move to competitive procurement.