The Auction Revolution

At last count, 48 countries had adopted auction-based approaches to subsidizing renewables, with an additional 27 countries seriously considering the idea.

The idea is simple (in theory). Set a target level of investment in renewable energy capacity, and then allocate these contracts to the lowest bidders. This idea is also somewhat polarizing because it marks a move away from “feed-in tariffs” which have been used in many countries, for many years, to subsidize renewable energy projects.

Feed-in tariffs (FiTs) have traditionally been set well above the prevailing electricity price. The concern among some renewable energy advocates is that determining tariffs via competitive auction will drive renewable energy subsidies down…or eliminate them entirely.

The potential to get more bang for each renewable energy buck is precisely what appeals to the governments on the supply-side of these subsidies. As renewable energy markets mature and penetration increases, a growing number of countries are looking to reduce subsidy costs by spurring competition.

The rise of auctions and the fall of subsidies

Some notable countries have recently turned green on the map above. Germany is one. Germany’s feed-in tariff system produced the “solar miracle” (truly miraculous to see 38 GW of solar PV capacity in a country that has the same solar potential as Alaska). But this came at a cost that was ultimately too high for consumers to bear. Last year, Germany ended feed-in tariffs in favor of competitive auctions for power purchase agreements.

India is another important example. For years the Indian government has guaranteed long term payments at above-market tariffs to renewable energy producers. These FiTs are rapidly being replaced by auctions in the hopes that competitive pressures will drive down procurement costs and increase transparency.

With all this auction adoption action, you might be wondering what’s happening to renewable energy procurement prices. The graph below shows auction prices for solar PV:

                             Source: International Renewable Energy Agency (IRENA) 2017.

The general trend that jumps out is the decline in prices through 2016. In 2017, this downward trend has continued.

                                                             “Intense competition drives solar tariffs to a new record”

Are these auction prices illusory?

There are legitimate concerns that the cost reductions we are seeing today are short-lived and/or illusory.

Some critics argue that small/medium sized companies can be at a disadvantage in these auctions. If smaller outfits start exiting, a more concentrated wind and solar industry could mean less competition in the long run.

It’s also possible that auction-based procurement is forcing bidders to be too aggressive. If the winning bids are based on overly favorable assumptions about future equipment costs or debt financing, the winner’s curse could come back to bite us.

Aggressive bids could also reflect developers’ willingness to take a hit in order to enter a new market, or strategic hopes to renegotiate additional remuneration after winning the auction. This kind of under-bidding could amount to a risk worth taking, particularly in emerging economies with ambitious renewable energy investment targets.

with inputs from Energy Institute Blog, IRENA, MERCOM