The Government of India has set ambitious renewable energy targets for 2022, in order to achieve its climate goals and enhance energy security. Given India’s budget constraints, a cost-effective policy path will be crucial to achieving these targets.
One way to reduce the cost of government support needed to achieve its renewable energy targets is through the tariffs it uses to procure renewable energy. Federal and regional governments in India have procured renewable energy through two mechanisms: feed-in tariffs, where the government fixes tariffs (i.e., the rate at which electricity is procured) for projects which are allotted on a first-come, first-serve basis; and auctions, where project developers quote tariffs to the government and are selected based on predefined technical and financial criteria. Typically, wind power has been procured through feed-in tariffs, and solar power through auctions.
Auctions for renewable energy are gaining popularity around the world due to their potential as a more cost-effective mechanism for the government. In this context, we examined auctions in India and elsewhere to answer two questions. First, have auctions been effective, or in other words, are they desirable as a project allocation mechanism? Second, how can they be designed to achieve India’s renewable energy targets, or in other words, how can they be made feasible?
We found that auctions are almost always cost-effective and have led to fair project allocation in most cases, but so far have not resulted in adequate deployment. We also found that high risk of certain factors can hurt the effectiveness of auctions, but that the right policy designs can lower risk to make auctions more feasible for renewable energy.
Effectiveness
We assessed whether auctions are desirable as a project selection mechanism by examining 20 renewable energy auctions around the world with respect to cost-effectiveness, deployment effectiveness, and the design to encourage market development.
Cost-effectiveness
We define cost-effectiveness as a reduction in tariffs due to auctions when compared with a baseline feed-in tariff. Given that government cost of support is directly proportional to these tariffs, this reduction translates to a reduction in government cost of support. In this context, we also examined whether auctions are discovering tariffs that are close to the rate of renewable electricity that a competitive market would discover, and whether transaction costs impact cost-effectiveness.
Auctions were almost always cost-effective. Auction-discovered tariffs were almost always lower than the baseline feed-in tariffs for the auctions we studied, meaning they were almost always cost-effective. We observed savings of up to 58% from the baseline feed-in tariff. 47% of the auctions had savings of greater than 20%; 24% had savings of 10-20%; and 29% had savings of up to 10%.