Renewable Energy Auctions: Design for Risk Allocation

Auctions are now the leading procurement method globally for the supply of renewables-based power. While auctions to date have helped deliver competitively priced renewable power, they have often done so within a financial architecture that limits developing countries’ ability to develop sustainable renewable energy sectors and build resilient local industries. This typically entails sovereign guarantees from the host country government, power purchase agreements (PPAs) denominated in hard currency, award criteria based largely on the lowest bid price, and imported equipment and services, often with limited consideration for broader development goals such as local value creation. Under current norms, private actors bear minimal risk, typically backed by government guarantees, while developing countries largely shoulder the risks of depleting currency reserves and plunging deeper into debt distress.

This report discusses elements within IRENA’s framework for the design of auctions, highlighting the trade-offs to consider for balancing multiple objectives: securing low prices and achieving high project realization rates, while limiting macroeconomic risks and debt burdens, and advancing broader development goals.

Auctions offer a potentially powerful way of securing renewable energy capacity at competitive prices as well as spurring local industry and improving local capacity, even in difficult investment contexts. As countries with varied experiences in implementing renewable energy auctions proceed with future rounds, auction design can further evolve to allow for contractual arrangements where risks are shared more equitably, and where objectives beyond price and project realization are also prioritized.

This report was researched and prepared by IRENA with contributions from ESMAP's Sustainable Renewables Risk Mitigation Initiative partners.

About the Sustainable Renewables Risk Mitigation Initiative  

Launched in 2018, the Sustainable Renewables Risk Mitigation Initiative is a multilateral partnership that aims to help emerging markets and developing countries develop their renewable energy sectors by attracting investments and promoting socio-economic benefits through targeted infrastructure. Partners include the Energy Sector Management Assistance Program at the World Bank, Agence française de développement, IRENA, the International Solar Alliance, Sustainable Energy for All, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and GET.transform.