Renewable wind energy: To auction, or not to auction

With an installed wind power capacity of 32.7 GW, India is the fourth-largest generator of wind power in the world. A commendable feat no doubt, and a reason to work even harder to achieve the 60 GW target from wind energy by 2022.

Achieving that target and creating a feasible and economically viable wind energy market in India will require the government and wind industry participants to be cognizant of trends and changes. The switch to an auction-based allocation of wind capacity from a feed-in tariff system has been done by the policymakers to encourage more competition and better price discovery.

While the advantages of an auction-based system of competitive bidding and better price discovery are obvious, one needs to keep an eye on the potential problems that might crop up. Excessive competition can at times lead to unviable auction pricing with serious ramifications for the industry. The trade-off between lower costs and delivering the targeted wind energy capacity needs urgent attention.

First and foremost, one needs to assess whether bidding for renewable energy projects can in certain instances lead to aggressive bidding by developers. While low prices are good for the eventual customer, it is important to find a right balance between low pricing and financially viable projects.

Projects that score high on low pricing but turn out to be financially unviable endanger the entire ecosystem with reduced wind energy generation, potentially distressed loans and contracts that are not honoured. A strictly enforced penalty mechanism can potentially be used to ensure to some extent that unviable bidding is avoided as penalties would encourage developers of wind energy projects to bid at financially viable levels.

In addition, it would also be prudent to look at the primary asset, i.e., the wind generation capacity of the site, and work towards a bifurcated market. High quality wind sites can potentially use auctions while feed-in tariffs might work better for wind sites of lower quality. Such a bifurcation will allow the market to gradually evolve towards an auction mechanism and yet provide India with an opportunity to realise its wind generation capacity. In addition, this will assist overall wind energy market development as pricing will be done based on the intrinsic value of the asset.

One would, of course, expect developers to price in the intrinsic asset value in their bids, but at times aggressive price wars can lead to pricing that is not viable. This is where the government may need to step in to ensure that pricing matches asset quality. As mentioned earlier, a bifurcated market would go a long way towards sustainable pricing in the wind energy market.

To understand the issue of wind energy auction mechanism better, it is important to learn a few lessons from other countries. In the paper "Renewable Energy Auctions and Tenders: How Good are They?", David Toke looks at Danish and South African renewable energy projects and concludes that a significant proportion of the cost reduction is due to technological improvements and not from the auction mechanism itself.

Feed-in tariffs set at the optimal level, above the marginal cost of the renewable energy developer, can potentially deliver the cost savings and yet ensure that project viability is maintained.

While the conclusions from the study may not be fully applicable to India, it is worth looking at. Auctions, for all their advantages, need to be looked at with an eye to creating a sustainable wind energy ecosystem.

A portion of the opportunity in wind energy in India is around repowering of existing wind farms with more efficient wind turbines. It is important to view this as a golden opportunity for India to become energy independent. Hence the additional energy generated through such turbine repowering would merit a case-by-case analysis in terms of whether to use an auction mechanism or feed-in tariff to encourage such business.

In summary, it is important for policymakers to keep an eye on how much new generation capacity in wind is seen in the years to come. India will have to maintain a balance between lowering costs and ensuring high deployment of renewable energy. Both feed-in tariffs or auctions, if used prudently, can aid in the growth of the wind energy sector. We suggest a mix of both.