Introduction

The energy transition is reliant on the establishment of renewable energy (RE) targets. According to IRENA’s ‘Renewable Energy Target Setting’ report (IRENA, “Renewable Energy Target Setting”), in 2015, a total of 164 countries worldwide have adopted at least one type of renewable energy target and have adopted support policies to address possible market failures, compared to only 43 countries in 2005 (IRENA, “Renewable Energy Target Setting”). Energy policies improve market stability, which by increasing the confidence of investors provides energy support. Therefore, these policies not only intend to promote the use of renewable energy but at the same time to achieve sustainable development objectives, which include socio-economic benefits such as income generation and job creation. In this regard, IRENA estimates that by the end of 2014, there were 7.7 million jobs worldwide in the renewable energy sector, excluding large hydropower  (International Renewable Energy Agency (IRENA), “Renewable Energy Auctions – A Guide to Design”)(Energypedia).

Policies must be adapted to reflect changing market conditions. Factors that influence the conditions for new power generation project and the introduction of new market players include the price decrease of new RE technologies, the growing prevalence of variable renewables in the power system, and greater emphasis in policy toward economic, social and environmental objectives (International Renewable Energy Agency (IRENA), “Renewable Energy Auctions – A Guide to Design”). Renewable electricity auctions (REAs) have become more and more popular as the competition rises for the introduction of renewable energy technologies in the market. With its establishment, renewable energy usage has been expanding due to the introduction of support policies (Renewable Energy Auctions in Developing Countries).

After unsuccessful results in Europe in the 1990s, REAs were barely used until the late 2000s. Nowadays, they are globally adopted as a standard renewable electricity (RE) policy, recommended by large intergovernmental organizations (IGOs). As the attention rises for this regulatory instrument, the main alternative instruments, feed-in tariffs (FITs) and tradable green certificate (TGC) schemes, have become less popular (Renewable Energy Auctions in Developing Countries). 

So how do energy auctions work and why did it become so popular? This article intends to answer the very fundamental questions related to the topic.

Different energy instruments

Renewable energy markets are different depending on national and local contexts. Therefore, different mechanisms are adopted by the government for facilitating the development and cost reduction of renewable technologies. Thus, The International Renewable Energies Agency (IRENA) established the main instruments that should be considered for the implementation of an effective policy, considering the context (Energypedia). These mechanisms are indicated in Table 1.

Table 1. Types of Renewable Energy Policies and Measures. Adapted from (IRENA, Auctions to Support Renewable Energy Deployment – Overview and Design Elements).

National Policy	Regulatory Instruments	Fiscal Incentives	Grid Access	Access to Finance	Socio-Economic Benefits
Renewable energy target Renewable energy law/strategy Technology-specific law/programme	Feed-in tariff Feed-in premium Auction Quota Certificate system Net metering Mandate (e.g., blending mandate) Registry	VAT/fuel tax/income tax exemption Import/export fiscal benefit National exemption of local taxes Carbon tax Accelerated depreciation Other fiscal benefits	Transmission/discount/exemption Priority/dedicated transmissions Grid access Preferential dispatch Other grid benefits	Currency hedging Dedicated fund Guarantees Pre-investment support Direct funding	Renewable energy in rural access/cook stove programmes Local content requirements Special environmental regulations Food and water nexus policy Social requirements

This article focuses on the regulatory instruments and in particular on renewable energy auctions. However, to gain a better understanding on this matter, the other two main alternatives in the same category are described. 

There are two main categories of regulatory instruments. The first, Tariff-based instruments (e.g., Feed-in-Tariffs) work by providing an economic incentive for generating electricity using renewable energy sources. Usually this takes the form of investment subsidies or payments for energy generated. In the second, Quantity-based instruments (e.g., Tradable Green Certificates), minimum targets for renewable energy in the energy mix are set and controlled by certain parties in the energy supply chain. Hybrid instruments, where auctions are inserted, are a combination of the two (Energypedia).

What are renewable energy auctions?

Renewable energy auctions and tendering schemes are a type of support mechanism/regulatory instrument for renewable energy technologies. In most cases, renewable energy auctions are opened by the government of a country. These specify the capacity (kW) or the electricity generation (kWh) which is up for auction, the generation technology and sometimes the generation location. Project developers can then submit a bid to the auction, outlining their project proposal and stating the price per unit of electricity at which they will be able to realize their project. The government then evaluates the different offers, which are ranked and selected in order of increasing cost or price until a volume, or the budget limit is reached. Lastly, the best candidates are selected and the government signs a power purchasing agreement with the successful bidders (Energypedia). 

Auctions are very flexible and must be adapted to the country’s specific circumstances for a successful implementation. These depend on the goals which the country wants to achieve through the auction (Grashof). Additionally, qualification requirements and compliance rules help ensure that the bidders have the financial, technical and legal capability to develop the project and that the project is properly implemented. Thus, reducing the risk of underbidding (International Renewable Energy Agency (IRENA), “Renewable Energy Auctions – A Guide to Design”).

The Alternatives

Other regulatory instruments include Feed-in Tariffs (FITs) and Tradable Green Certificates (TGCs). 

In FITs, every interested investor is entitled to the administratively set remuneration that follows the estimated costs of different technologies. They are fixed electricity prices that are paid by the electricity grid, system or market operators to renewable energy (RE) producers for each unit of energy produced and injected into the electricity grid. The FIT is paid for a certain period of time usually associated with the economic lifetime of the RE project (Grashof). Another possibility is to calculate a fixed maximum number of full-load hours of RE electricity production for which the FIT will be paid. In most RE support schemes, the level of FIT is determined by the levelized cost of electricity (LCOE) produced from RE allowing for costs recover (including capital, O&M, fuel, financing) (Laumanns). 

TGCs are used to make players achieve RE quotas set by the government.  With green certificates, governments can set exact targets as to the level of renewable production in a country, while the market finds the most efficient way to meet these targets. A green certificate is usually issued per 1 MWh of renewable power, but in compliance markets the number of green certificates may depend on the source, whereby greener or more innovative technologies obtain more certificates than other technologies per MWh of power produced. A green certificate can be seen as the opposite of an emission certificate: emission certificates set a cost on non-renewable production and set a maximum to the total emissions, whereas green certificates create an extra revenue for renewable production while ensuring a minimum of renewable production. The price of the green certificates depends on the scarcity in the market. The price increases when there are higher targets of government policies (Consulting). 

One difference between these strategies is the competition. In FITs, RE project developers compete for land use and between RE component suppliers. In REAs, developers also have to compete for access to state-organized remuneration during auctions. Lastly, for TGCs, the level of remuneration per project is not determined once but continuously on the markets for power and green certificates (Grashof).

Renewable energy auctions opposed to FIT

FITs had been adopted by 20 European countries, including, for example, Denmark, Germany, Spain, Ireland and Portugal (Grashof). This was a successful strategy, however, policy makers found two main issues related to it, namely, cost and control. Since no limit was imposed for the number of players in the market, this number became higher than what was needed, bringing problems in terms of budgets.

The main difference between FIT and auctions is the price setting. In the first case, the price is fixed by the policy makers, whereas in auctions the industry determines the price for the project by means of bidding. Deciding between these two methods, depends on many factors. 

In one hand, auctions are a useful way of finding the true cost of a technology when few experience with setting prices for a certain renewable energy technology exists. On the other hand, a certain degree of competitiveness must exist, so that the generation capacity offered by all of the bidders is higher than the demand. In situations where these conditions cannot be met FIT are often a better option. Usually auctions are better for large scale projects and established technologies whereas FIT present a smaller risk for new and small scaled ones (Energypedia).

The main advantages and disadvantages of energy auctions are described in Table 2.

Table 2. Main advantages and disadvantages of energy auctions as a policy instrument. Adapted from (Passey, R., Watt, M. & Woldring).

ADVANTAGES

DISADVANTAGES

Guaranteed purchase at a fixed price.Guaranteed access to the grid.Better financing options and potentially lower prices. Cost efficiency reveals the true market price of different technologies. Limits can be set by the government for the capacity and the budget. Electricity generation from RE is more predictable. Easier planning bids can be selected according to specific criteria. This allows for multiple country policies (ex: environment, employment) to be considered.

Without regularity, might lead to discontinuing (stop-start) market development. Difficult for small/medium-sized bidding companies due to the high transaction costs (project proposals need planning, feasibility study, risk assessment) and the risk of not getting a return on these investments in case they are not chosen. High administrative costs. High competition can lead to underbidding which results in low financial returns, contract failure or attempted post-auction price raises by successful bidders. If there is not enough competition offers might be too high. In open auctions, there is a risk of collusive behaviour between bidders to drive up prices.

HOW DO ENERGY AUCTIONS WORK?

The following schematic represented in Figure 1 summarizes the main components of auction design.

Figure 1. The design of the auction in scheme. Retrieved from (IRENA, Auctions to Support Renewable Energy Deployment – Overview and Design Elements).

There are essentially three different models for auctions. In the first, Bid Auctions, propose the price and quantity of generation. In this process, bidders are not able to see each other’s proposals. The bids are ranked from lowest to highest, according to their price and possibly other additional criteria. Then the best ranking projects are selected one by one, so that the volume of renewable energy generation which is being auctioned is covered. In Iterative Process/Descending Clock Auction the price for a new renewable energy generation project is first declared. Then, the bidders then come forward and announce what quantity of generation they are able to offer for this price. Subsequently, the price is lowered by the auctioneer, leading to lower generation quantities offered by the bidders. This process is over once the generation quantity offered matches the volume of new renewable energy which the government wants to invest in. In this auction proposals are public for all bidders and these can adapt their own offers. The last type is  the Hybrid Type Auction which are a combination of the others (Renewable Energy Auctions in Developing Countries)(Energypedia). 

TRENDS

The energy market is becoming more and more complex, leading to more complex energy policies in many countries, which make rigid support mechanisms models less preferred. Hybrid support mechanisms are gaining in popularity. For example, it is common for two different types of support mechanisms to be run in parallel. Therefore, FIT and Auctions can well be implemented in one country at the same time (Energypedia).

By August 2017,  48 countries had adopted auction-based approaches to subsidizing renewables, with an additional 27 countries seriously considering the idea (Meredith Fowlie). Figure 2 highlights the countries that have awarded energy auctions in 2016. 

Figure 2. 2016 highlights on renewable energy auctions (IRENA, Auctions to Support Renewable Energy Deployment – Overview and Design Elements).

The global increase in auctions is accompanied by a decreased price trend for RE prices. The trends for solar PV prices and onshore wind, represented in Figure 3 and Figure 4, are an example of this.

Figure 3. Price trends: solar PV auctions 2010-2017 (IRENA, Auctions to Support Renewable Energy Deployment – Overview and Design Elements).

Figure 4. Price trends: onshore wind 2010-2017 (IRENA, Auctions to Support Renewable Energy Deployment – Overview and Design Elements).

During 2019, the total number of countries that have used auctions increased to 109 (up from 98 in 2018) as new countries held tenders during the year for the first time (Henner and REN21).  The following chart shows the last numbers referring to the renewable energy policies adopted  worldwide.

Figure 5. Cumulative Number of Countries with Feed-in and/or Tendering Policies, 2009-2019. Retrieved from (Henner and REN21).

Examples

Auctions and tenders were held in nearly all world regions, and in a trend continued from the previous year. During 2019, at least 11 new countries either adopted auction policies for renewable energy or held auctions for the first time (International Renewable Energy Agency (IRENA), “Renewable Energy Auctions – A Guide to Design”).

Africa

In 2019, many auctions were held in Africa. For example, Nigeria issued a tender for a 15 MW solar PV project with a 5 MW battery energy storage system (International Renewable Energy Agency (IRENA), “Renewable Energy Auctions – A Guide to Design”). 

At the end of 2019, Kenya was developing the mechanisms required to establish an auction system as provided for in the country’s Energy Act of 2019. Some governments innovated with auction design (Henner and REN21). 

Europe

Again in 2019, in Portugal, a solar PV auction yielded the world’s lowest bid to date. Italy’s new auction and incentive scheme for large-scale renewable power projects includes a premium on top of the market price of electricity (Henner and REN21). Ukraine’s Law on Renewable Energy Auctions went into effect, which introduced auctions in the country. Poland’s energy regulator launched a wind and solar electricity auction (Henner and REN21).

Asia

Pakistan announced plans to introduce renewable energy auctions starting from December 2019. Mongolia is also on this way to introducing REAs if the proposed amendments to its Renewable Energy Law are passed (Henner and REN21).

South America 

In 2005, Brazil auctions were held to contract new RE power generation capacities in 2007 [76]. In 2009, with a global oversupply of components, this led to unexpected low onshore wind prices .In 2011, the prices for onshore wind were even lower for hydro and natural gas plants, an incredible result for only a space of two years (Grashof). In 2019, Colombia established new rules for the country’s second long-term renewable energy auction including time blocks within which electricity generators and buyers must make offers (Henner and REN21).

Despite the many successes in 2019, several of the year’s scheduled auctions were under-subscribed or cancelled. For example, in Germany five of the six onshore wind tenders were under-subscribed and Mexico cancelled its fourth renewable energy auction early in 2019 due to administrative changes in the entities involved (Henner and REN21) .

Conclusions

The 2017-2018 report by the International Renewable Energy Agency (IRENA) outlines the following findings (International Renewable Energy Agency (IRENA), “Renew. Energy Auction. Status Trends beyond Price”):

• Renewable energy auctions continue to reveal competitive prices for renewable power in markets around the world.
• Solar PV and wind are the most widely auctioned technologies.
• Global prices for solar PV power continued to decrease, while onshore wind power showed a slightly higher average global auction price in 2018 compared to the year before.
• Renewable energy auctions are increasingly used to achieve objectives beyond price, including timely project completion, solar and wind integration, and supporting a just and inclusive energy transition.
• Auctions can strengthen solar and wind integration by ensuring procurement of the system-friendliest power plants.
• Auctions design, in combination with, financial, industrial, labour and education policies, can contribute to fulfilling broader socio-economic aims.

References

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