Auctions can be an effective mechanism to achieve India’s renewable energy targets

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May 14, 2015: New analysis by Climate Policy Initiative and the Indian School of Business demonstrates that using auctions to procure renewable energy projects can be effective in meeting the government’s dual goals of the deployment of ambitious renewable energy targets and meeting those targets cost-effectively.

In the 20 auctions examined from around the world, auctions were almost always more cost-effective when compared to feed-in tariffs. Auctions for solar power, worldwide and in India, have resulted in tariff reductions of up to 58%. In countries other than India, auctions for wind power have resulted in tariff reductions of up to 30%. Typically, wind power in India has been procured through feed-in tariffs and solar power through auctions.

While there is potential for auctions to inhibit deployment, the analysis also found that appropriate policy support could improve the ability of auctions to deploy the intended amount of renewable energy. Climate Policy Initiative conducted a comprehensive assessment of the risks which can affect auctions, and found that certain risks, if not managed properly, can result in poor deployment. Appropriate policies, for example , paying successful bidders what they bid instead of requiring them to match the lowest bid, improving transmission infrastructure and permit procedures, stringent penalties for delays in deployment, and payment guarantees for off-takers, can reduce the risk of non-deployment.

Specifically for wind power in India, holding auctions only after identifying the project site, planning the transmission infrastructure, and completing resource assessment studies, could minimise the risk of non-deployment. A recent report by Climate Policy Initiative indicates that because wind power is already cheaper than the imported coal it would replace, it is already a cost-effective path to meet India’s overall energy needs; auctions may further lower costs.

“Our analysis demonstrates that auctions for renewable energy projects have the potential to help the government achieve India’s ambitious renewable energy targets in a cost-effective manner. At the same time, focusing on better risk management can help improve auctions’ success in deploying capacity and further increase their viability,” said Gireesh Shrimali, Fellow at Climate Policy Initiative.