News about the rate at which new renewable power capacity is being added to grids around the world has been overshadowed by a remarkable trend that could revolutionize the renewables sector. Over the past few years, more and more countries have adopted or are considering competitive bidding procurement processes for MW or MWh—otherwise known as auctions or tenders—to boost renewable energy capacity. The rate at which countries are adopting auctions is growing faster than administratively set feed-in-tariffs (FITs) or premiums, as well as quotas, which include renewable portfolio standards. And buoyed by increasing maturity and rapidly falling costs of renewable technologies, these auctions are showing significant success.
While the first renewable power auctions were held in the 1990s by the UK, only a handful of countries—Brazil, Canada, Chile, China, and Ireland—adopted them in the mid-2000s, during a wave of power sector reforms. According to the International Renewable Energy Agency (IRENA), by 2013, 44 countries had used auctions for renewable energy contracts, but by mid-2016, that number surged to 67. Today, auctions “are the most rapidly expanding form of support for renewable energy project deployment and are becoming the preferred policy tool for supporting deployment of large-scale projects,” explained global renewable energy policy network REN21 in a June 2017 global status report.
A key reason that auctions are being adopted so quickly is that they aren’t tied to a specific market arrangement or regulatory-institutional framework, making them attractive to completely liberalized markets as well as single-buyer markets and even vertically integrated monopolies, IRENA noted in a June 2017 report, “Renewable Energy Auctions: Analysing 2016.” For investors, auctions appear a safer bet than FITs or tradable green certificate mechanisms because winners are typically awarded legally binding contracts that don’t hinge on political flip-flopping. As critically, because auctions create competition, they are driving down the prices of renewable power drastically.
Benjamin Attia, a GTM Research solar analyst, noted benefits offered by auctions vary by the market. “Mature solar markets including Germany, Japan, and the UK have used competitive procurement as a market-capping mechanism to remedy subsidy budget deficits, market saturation, curtailment and grid-balancing issues, and high costs,” he said. High-growth markets like India and Mexico have used the same mechanisms as a “scale-up engine to centrally allocate projects on weaker grids, provide credit and offtaker guarantees or assurances, and create a low-cost, no-subsidy multi-gigawatt pipeline,” he added.
However, the way auctions are designed to boost capacity varies widely, and IRENA cautioned that comparing auction outcomes—including auction prices—for different countries and even different auctions in the same country can be challenging, owing to policy objectives, underlying conditions, and renumeration structures. IRENA also points out that policymakers and industry are wary that the “true costs of renewable energy can be underestimated in auctions,” especially in situations where prices are dropping quickly, such as with solar photovoltaic (PV) and onshore wind. “This can result in the winner of the auction facing very low or even negative profits.” This “winner’s curse,” as IRENA aptly dubs it, is usually associated with a transitory auction climate, but it also happens in more mature climates, owing to overly aggressive bidding.
“Overly aggressive bidding (or underbidding) poses a significant risk of underbuilding [not being able to complete the project] and delays, with more serious repercussions in the long run,” IRENA said. And according to Moody’s Investors Service, power generators bidding in auctions face a long list of risks. The biggest risk, it said in a November 2017 report, is that their development activities could “proceed at a pace that is unsustainable.” Projects could be stricken with lower tariffs, a margin of error on assumptions for capital cost, project delays, equipment quality, payment delays, and curtailment. Power generators “will need to balance their goals for adding capacity against the risk of relying on overambitious forecasts for technological advancement, which may not materialise,” it said. The ratings agency urges developers to mitigate risks with portfolio diversification.
In some countries, those risks have prompted a reevaluation of auction designs. In Brazil, for example, a country that adopted technology-specific renewable energy auctions in 2007, depreciation of the Brazilian real and ramped up financing costs led to underbidding—where generators offered a bid price that did not adequately cover costs—and defaults by developers. The country is now set to hold “decontracting auctions” in December to relieve developers that cannot deliver contractually obligated projects.
Still, other auctions have made notable headlines recently. Mexico’s third power auction held in November 2017 yielded some of the lowest renewable power prices in the world, beating out even Chile’s, whose prices fell just as sharply in an auction held earlier that month (see POWER Digest in this department for more details). IRENA noted that average contract prices for wind and solar PV have also fallen dramatically in Morocco, Peru, and the United Arab Emirates (Figure 2).
Even auctions for less-mature renewable technologies have attracted interest because they have resulted in a large share of contracts at record-breaking prices. While Germany in 2016 ended FITs in favor of competitive auctions for power purchase agreements, in April 2017, it held its first offshore wind auction, where winning bids were below market prices for power, essentially rendering winning projects “subsidy free.” In 2016, Argentina and Peru each held bioenergy capacity auctions, and Dubai announced an auction for solar thermal power.
For now, industry experts are carefully watching the outcomes of these auctions. Even as they evolve, the consensus is that auctions will grow more popular worldwide.
—Sonal Patel is a POWER associate editor.