Auctions and tendering

Auctions and tenders have become a preferred alternative to feed-in tariffs (FITs) and feed-in premiums (FIPs) in many countries, particularly for scaling up large, utility-scale RE projects.

An auction is a competitive process for procuring electricity generated by renewable energy. It is designed to allocate a supply contract or incentive based solely on the bids submitted by participating bidders according to transparent award rules.

In auctions, there is no negotiation after the bidding concludes and the price is the only criterion to be evaluated. While the negotiated tenders may include additional criteria and have a post-bidding negotiation stage between buyer and seller, in which changes in project size and price are possible.

RE auctions and tenders are organised by public authorities who have the responsibility for the preparation of the auction documents, the publication of the auction, the evaluation of the bids and the selection of the winning bids. Depending on the auction design, the bids can refer to RE installed capacity or electricity production. The government sets the auction volume demanded, bidders then offer a price at which they are willing to build the project, and the government ranks the bids. Ranked bids are awarded until the auction volume is met. Auctions, therefore, organise the access to off-take contracts and determine the level of the price paid per unit of RE electricity or capacity.

Auction and negotiated tender procedures foresee competitive bidding and, ideally, limit participation to serious bidders via the use of qualification criteria. The auction is competitive if the total cumulated capacity or electricity production that is being offered in the bids exceeds the capacity or electricity production that is being auctioned.

The success of RE auctions is highly dependent on the auction design and process, which typically include:

• Reverse auction format, denoting the fact that bidders are bidding down to the lowest price, rather than upwards
• Auctioned item and volume (amount of electricity generation, installed capacity or financial budget)
• Site-specific (project site is pre-selected or pre-developed by the government) or site-agnostic (project sites are chosen by the bidders) auctions
• Technology type and technology size
• Static/sealed-bid auction (participants submit their bids simultaneously, and are unaware of competing bids) or dynamic auction (bidders observe the development of the competing bids, and adapt their bids during the auction)
• Technical and commercial requirements of the projects (grid connection agreements, environmental permits, approved zoning plans)
• Qualification criteria for participants (e.g. turnover volume, references, financial position)
• Financial guarantees from bidders, used to back up the penalties incurred in the event of a delay or failure to realise a project
• Deadlines and penalties, defining time commitments and the consequences for bidders for the non-realisation or delay of awarded projects
• Ceiling price, set in order to eliminate the risk of excessive bids that would result in high costs for the RE support scheme.

Auction and tender schemes bring the following main advantages:

• Stimulate competition between different operators, locations and technologies and provide cost-efficient way to promote RE technologies
• Contribute to discovery of the true costs of RE technologies and prevent overcompensation of electricity producers
• Effective for scaling large capacities in a relatively short time
• Allow planned and coordinated RE development and capacity additions
• Adapt to technology developments, changes in costs, market prices and conditions.

The use of RE auctions and other competitive price mechanisms has surged globally over the recent 10-15 years. This shift was driven by declining technology costs, the need for cost-competitive procurement and integration of RE into electricity generation mix. Auctions and tenders helped to attract significant private sector investments for large-scale RE projects. Auctions have also strongly facilitated the achievement of record-low costs for such renewables as solar PV and onshore wind (see Figure 3). Since 2010 levelized cost of electricity (LCOE) has declined by 10.4 and 3.4 times for large scale solar and onshore wind respectively.

Figure 1: Global weighted average LCOE of onshore wind and utility-scale solar PV projects, 2010-2023

Source: IRENA (2024), Renewable power generation costs in 2023

Auctions and tendering are being successfully used for large wind and solar PV and CSP power projects, as well as for biomass and geothermal power worldwide. Today, most utility-scale renewable electricity is procured through auctions and tenders. They are also increasingly being used for renewable-based hydrogen (including in Albania, Algeria, Greece, India and Romania)[1].

[1] IRENA, COP28, COP29, GRA, MoEA and Government of Brazil (2024), Delivering on the UAE Consensus: Tracking progress toward tripling renewable energy capacity and doubling energy efficiency by 2030