Promoting Renewable Energy through Auctions
This knowledge note singles out auctions as an important mechanism that has been implemented in a growing number of countries in recent decades. It features case studies of auctions designed to promote the generation of electricity from renewable sources in Brazil, China, and India. Auctions in various forms are being used to promote the generation of electricity from renewable sources. Properly structured auctions can avoid the disadvantages of feed-in tariffs and renewable purchase obligations. Moreover, they offer the best of both of these early mechanisms, providing stable revenue guarantees for investors while also avoiding the risk of overbuilding. They do this by determining both price and quantity in advance. Promoting renewable energy through auctions is important, because experience with the use of auctions can guide future efforts. Among the examples of the benefits to be obtained from generating electricity from renewable sources are (i) increasing countries' energy security by reducing their dependency on fossil fuel imports, (ii) reducing greenhouse gas emissions as part of a worldwide effort to mitigate climate change, (iii) promoting electrification while reducing the need for isolated applications such as diesel generators, and (iv) minimizing local pollution. Auctions are an effective way to stimulate competition among investors, provide price disclosure while eliciting the right amount of investment, and offer revenue stability via long-term contracting.