Tenders and Reverse Auctions
Under a tender or reverse auction program, a government or utility designs a process to select bids and procure electricity to meet specified capacity goals. Effectively designed auction approaches can lower costs through encouraging competition among developers and electricity suppliers (Couture et al. 2015) and are often most effective for utility-scale projects given the costs of administering such programs (Bird et al. 2012, UNFCCC 2015). Many countries have adopted reverse auction approaches for electricity procurement, with project developers submitting bids to develop a project during a specific period (Miller et al. 2013; UNFCCC 2015). Tenders and reverse auctions allow prices to be set through a competitive bidding process, providing an approach to establish long-term fixed price contracts for electricity procurement (Couture et al. 2015). In some cases, auctions include specific project requirements in terms of size, technology, application and may also include other considerations for project selection (e.g., water use, GHG emissions, job impacts, etc.).
In some countries, auctions are being combined, or used in parallel, with FITs in policy hybrids, whereby FITs are used for smaller-scale projects and auctions are used for larger-scale procurement.
Align Auction Design with Higher Level Goals
To support broader development goals, governments and/or utilities can incorporate specific criteria with the project selection process that move beyond a singular focus on cost criteria. Examples might include: GHG emissions, water use, and job creation impacts, among others. In some cases, governments and/or utilities may wish to support deployment of certain technologies that align with broader goals (e.g., renewable energy deployment, GHG mitigation) and can, therefore, consider technology-specific auctions and/or caps on certain technologies (Couture et al. 2015).
Support Well-qualified and Diverse Investor Participation
Requiring project developers to provide information on technical capabilities in advance of auctions can help to ensure a strong pool of qualified bidders. Provision of this information can occur under a “two-phase tender process” (Cox et al. 2015, Cozzi 2015). To further ensure preparation of bidders, auction designers can also consider requiring environmental and/or other permits to be achieved before the bidding process (Maurer 2011). To support diversity, establishing project size caps can allow for a variety of investors to participate in auctions (Couture et al. 2015). However, the benefits and costs of engaging a wider variety of investors (e.g., small businesses) should also be evaluated as the administrative costs could outweigh the benefits for some smaller-scale projects (Couture et al. 2015, Bird et al. 2012).
Streamline Auction Processes and Administration
To reduce administrative burden, processes associated with permitting, bidding, project review, and approval should be simplified and streamlined. For example, easing permitting and study requirements for certain project sizes can reduce costs while also accelerating implementation (Cozzi 2015). Administrative and contracting entities (that will establish PPAs) should be clearly assigned and articulated through this process. Through streamlining administrative processes, costs can be reduced, also allowing for greater participation of investors (Couture et al. 2015).
Ensure a Transparent and Competitive Process
Entities designing and implementing auctions should take early action to ensure information is provided to developers in a transparent and timely manner. Any changes to the process should also be made transparently and as infrequently as possible. Ensuring policy stability as well as robust, accurate and open information will support greater competition and investment (Cox, 2015, UNFCCC 2015). Further, controls should also be put in place to ensure that auctions are not manipulated. For instance, rules can be established to ensure multiple eligible small projects are not located on one property or within a certain distance of one another (Couture et al. 2015). Finally, auction and tender processes should be designed to support competition through considering upfront costs required to submit bids. In some cases, high costs associated with bid submission can reduce the competitive pool to only large investors (Couture et al. 2015).
Address Potential Implementation Challenges
Following an auction, various challenges can impede project implementation. To support positive deployment outcomes, auction designers may consider clauses that place a penalty on project developers for not following through with implementation. Further, auction designers can design approaches to mitigate underbidding which can result in unviable projects that are unable to cover marginal costs and attract finance (Maurer 2011). Grid connection challenges can also impede implementation and auction processes and should be underpinned by strong interconnection policies and coupled with grid connection studies to ensure efficient and optimal integration (Cozzi 2015). Auctions should also incorporate elements such as power purchase agreements, guaranteed interconnection, financial support (e.g., for grid access and roads, tax concessions, and soft loans), robust resource and technology assessment, and consideration of pre-selected sites to support implementation (Maurer 2011).
Consider Hybrid Models
Policymakers can consider using a mix of auctions/tender approaches and FITs to encourage deployment of a variety of sizes and applications of renewable energy projects and to engage a diversity of investors (UNFCCC 2015, Miller et al. 2013, IRENA 2015, Couture et al. 2015). For example, auctions could be used for utility-scale projects and FITs could be used for residential and small commercial projects.
- Snapshot: Peru Renewable Energy Auctions, Revisited
- Auctions combined with FITs: “The Next Generation of Renewable Electricity Policy.” (Couture et al. 2015)
Technical Assistance Example
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Cox, Sadie, Terri Walters, Sean Esterly, and Sarah Booth. 2015. "Solar Power: Policy Overview and Good Practices." Golden CO: National Renewable Energy Laboratory.
Cozzi, Paolo 2012. "Assessing Reverse Auctions as a Policy Tool for Renewable Energy deployment (No. 007)." Medford, MA: Center for International Environment & Resource Policy (CIERP), The Fletcher School at Tufts University.
Ferroukhi, Rabia, Diala Hawila, Salvatore Vinci, and Divyam Nagpal. 2015. "Energy Auctions: A Guide to Design." (IRENA)International Renewable Energy Agency and Clean Energy Ministerial.
Maurer, Luiz T. A., and Luiz A. Barroso. 2011. "Electricity Auctions: An Overview of Efficient Practices." Washington, DC: The World Bank.
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UNFCCC Secretariat. 2015. "Updated Compilation of Information on Mitigation Benefits of Actions, Initiatives and Options to Enhance Mitigation Ambition: Renewable Energy Addendum." Bonn, Germany: UNFCCC.
Kreycik C. E., Couture T. D., Cory K., 2011. "Procurement Options for New Renewable Electricity Supply." Golden, CO: National Renewable Energy Laboratory.
Lucas, H., Ferroukhi, R., Hawila, D. 2013. "Renewable Energy Auctions in Developing Countries." Abu Dhabi, UAE: International Renewable Energy Agency (IRENA).