2.5.7. Competitive Procurement and Reverse Auctions
“Competitive procurement is not unique to the energy sector, and is simply defined as a method for purchasing a product or service through an open and competitive process with multiple bidders. In the electricity sector, competitive procurement refers to the purchase of an energy or capacity product through a competitive tender process. Instituting this competitive framework is central to the development of a low-cost and high-renewable electricity sector because it provides a vehicle for tendering projects transparently, as opposed to on a bilateral or negotiated basis, builds investor confidence in the system, and fosters renewable energy growth,” (Source: Technical Note: The Basics of Competition & Auctions for Renewable Energy). “Reverse auctions are a type of competitive procurement in which the lowest price wins, as opposed to a silent auction where prices are bid up. Generally, the regulator conducts a process of pre-qualification prior to the auction to select preferred bidders. The regulator sets a certain level of capacity and/or energy that is needed at a certain price, and fills the capacity until that level is met. Auctions can be structured into multi-round programs, where each successive round establishes more confidence and pushes prices lower. The process can be used for any energy source or even for all sources at once (technology-neutral) and usually includes the use of an electronic bidding platform,” (Source: Technical Note: The Basics of Competition & Auctions for Renewable Energy).
1. Appropriate capital to meet borrower needs
MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER
VIGNETTE: AUCTION DESIGN SUPPORT TO COLOMBIA
Historically, Colombia has relied on its rivers for cheap and plentiful power. Large-scale hydroelectric plants provided the majority of Colombia’s electricity needs. In fact, hydropower currently supplies nearly 70 percent of the country’s electricity, but has become increasingly vulnerable to weather variability, specifically the hot, dry conditions associated with El Niño. Colombia’s over-reliance on hydropower is now a critical energy security issue.
Fortunately, Colombia is rich in renewable energy resources and has some of the greatest wind and solar potential in Latin America. The Government of Colombia recognizes that a diversified energy market, including the addition of large-scale variable renewable energy (VRE), is key to establishing a reliable and resilient energy supply. Globally, the most significant barrier to developing variable renewable energy is attracting private investment. Fortunately, reverse auctions provide a solution by offering stable, long-term contracts to generators who in turn compete to deliver the lowest price to the buyers (electricity retailers and distributors). The Government of Colombia will only award contracts to the lowest priced projects. Other countries in Latin America, including Mexico, Brazil, Chile, and Argentina have implemented successful energy auctions with low bid prices. Colombia noted these regional successes and began to establish a framework in 2018 to hold reverse energy auctions on an aggressive timeline.
Colombia’s Ministry of Mines and Energy (MME) held the country’s first variable renewable energy auction on February 26, 2019. However, due to the auction design and Colombia’s antitrust rules, the auction resulted in no awards. After the February auction, USAID interviewed 12 auction participants (6 buyers, 6 sellers) and completed an assessment to suggest recommended changes for future auctions. MME revised the auction rules and is preparing a second auction with awards to be announced in late October 2019. USAID continues to offer targeted technical assistance during the auction process to attract investment, transition toward a more diversified electricity sector, and drive down costs for consumers.