Last week, Dubai's Electricity & Water Authority received a bid for 800 megawatts ofsolarat the rock-bottom price of 2.99 cents per kilowatt-hour. It is yet more evidence that auctions are becoming critical tools for lowering solar electricity costs around the world. 

Plenty has been written about the significance of cost drops in PV modules, balance-of-system components and installation techniques. But in markets from Latin America to Europe to India, the competition unleashed by auctions has also been a significant factor in pushing power-purchase agreement (PPA) prices down and, as a consequence, making solar competitive with coal. 

Auctions around the world yield lower prices

According to GTM Research’s recently released Global Solar Demand Monitor, auctions have been a major contributor to the average worldwide reduction in PPA prices of 9 percent last year. The report offers a glimpse at the link between the use of auctions and the increasing price-competitiveness of solar power. Some highlights include:

  • In its quest to deploy 100 gigawatts of solar power by 2022 year, India’s central and state governments have relied almost exclusively on auctions. Since launching in 2010, the country’s utility-scale market has grown rapidly, building up a pipeline of 23 gigawatts. India has also seen its PPA prices for solar plummet, dropping 25 percent in 2015 alone.
  • Before Dubai, Mexico was home to the lowest priced solar PPA in the world. In March, the country’s first competitive Clean Energy Auction yielded what was then a historically low bid of 3.5 cents per kilowatt-hour by Enel Green Power. Overall, solar won 72 percent of the capacity awarded -- besting wind, hydropower, co-generation, combined-cycle gas and geothermal -- with a record low average price of just over 4.5 cents per kilowatt-hour.
  • In Germany, auctions held last year awarded a total of 500 megawatts of solar and prices for PPAs fell 13 percent, a not insignificant decline given the maturity of the market. In 2016 and 2017, Germany will award another 700 megawatts of solar via competitive auction.
  • In Brazil, auctions since the end of 2014 have awarded a total of 2.6 gigawatts to solar developers, and PPA prices fell by 8 percent in 2015, despite the decline in value of the country’s currency. Peru held its first competitive auction for renewables this past February, an event that resulted (briefly) in a record-low solar PPA price for South America. 

Replacing feed-in tariffs

In many markets around the world, auctions are replacing feed-in tariffs as the solar procurement policy of choice. The report from GTM Research notes that the number of countries with feed-in tariffs has dropped 22 percent since 2014. By contrast, the number of countries utilizing auctions to boost solar demand has spiked 92 percent in the same period, jumping from 14 countries to 27.

Mohit Anand, a senior analyst at GTM Research who spearheaded the Global Solar Demand Monitor report, argues that a variety of reasons have prompted policymakers to lose their fervor for feed-in tariffs. Money is a big one. “The policy was wonderful and of course spurred gigawatts of deployment, at least in Europe,” he said. “But I think in the context of the financial crisis and the large deficits that came to light in many European countries, there was a huge pushback against feed-in tariffs.”

Besides finances, the success of feed-in tariffs in sparking a rush of solar development has also prompted grid-integration concerns. As much as anything, said Anand, feed-in tariffs have lost favor because they don’t incentivize the sort of cost reductions necessary to make solar competitive with other sources of generation.

Auctions provide the downward pressure on costs policymakers crave and also have added transparency benefits that are particularly important in countries like India. “Most important, it pushes down the price of solar because, by definition, it is competitive bidding,” said Anand. “The process itself is simple and, if done well, it is fairly transparent and fairly corruption-free, which is a big deal in a country like India and other developing countries.”

Quantity over quality?

Despite their increasing popularity, there are legitimate questions about auctions. In particular, while there is little argument that auctions provide an effective vehicle for signing lots of PPAs at attractive prices, it’s less clear whether the solar power plants that get built will reliably produce electricity over the long term. In other words, it’s uncertain whether developers can deliver on their promises.

“The downside is it has incentivized aggressive competition and often unviable bidding, which can create a lot of risks in terms of reliable and effective procurement of solar and long-term deployment of solar,” said Anand. “We don’t know how bad it can be because everything I’m telling you [about auctions] is only five to eight years old. Nobody knows if the gigawatts being built in India and globally through auctions are going to end up as scrap in 10 to 15 years.”

According to Jasmeet Khurana, associate director of Bridge to India, a consultancy active in the Indian renewable energy market, officials in charge of auctions have put in measures designed to ensure quality.

“The auction authorities ask for bank guarantees linked to the performance of projects,” said Khurana, who also says there are worries about equipment and construction quality, though they’re not widespread. “If projects do not perform, the investors lose both revenue and their bank guarantees. The onus of ensuring quality is on the developers and investors.”

Still, in a country like India, which seeks to build 100 gigawatts of solar by 2022, the ability to quickly push down prices with auctions may be worth accepting some (or even a lot) of solar power plants that don’t perform as well as promised. “To be honest, countries like India -- they are hoping to do 100 gigawatts. For them, that is only possible if solar goes cheap enough,” said Anand. “If the first 20 gigawatts goes to scrap, but as a result, it brings competitive and widely scalable solar, they are happy to have that.”