Full Spectrum: Energy Analysis and Commentary with Jesse JenkinsSummary: Reverse auctions can be used to avoid paying too much for solar PV and reduce the costs of renewable energy subsidy programs

The Australian Capital Territory (ACT) has implemented a novel way to support renewable energy: a reverse feed-in tariff auction. The first reverse auction ran from January 2012 to August 2013 and attracted a highly competitive pool of 49 proposals from 27 different participants, each competing to secure a 20 year feed-in tariff (FiT) contract to supply the territory with a total of 40 megawatts from solar photovoltaic projects. Three winning projects were selected based on both the FiT price requested and a rigorous evaluation of the candidate’s ability to complete the project on time and on budget. 

Projects were evaluated in a two-stage process. An initial “prequalification” process screened out projects to mitigate the risk that an applicant might be selected on the basis of price, but might not be able to deliver on its bid—a problem that has plagued other reverse auction programs in the UK, China and elsewhere. Only 45 percent of initial proposals secured prequalification in the ACT’s auction process. This rigorous screening discourages speculators and financially insolvent companies from participating in a second, final bidding stage and allows program reviewers to focus greater diligence on the remaining proposals.

This reverse auction may be a model for reforming FiT programs elsewhere. FiTs, which offer long-term price guarantees for renewable energy projects, are effective at reducing risk for project developers. However, setting the correct price guarantee has proven difficult. If governments set the price too low, developers will not build projects. Yet if prices are too generous, developers flood the market. The boom in renewable energy projects can make the cost to government budgets or electricity consumers balloon. Reverse auctions offer a solution: the auction discovers the right price to procure the desired amount of renewable energy at the lowest cost, while spurring competition between project developers. In the ACT’s case, the price paid to the three winning proposals ended up more than 40 percent below the government’s expected cost.

Publication: “The large-scale solar feed-in tariff reverse auction in the Australian Capital Territory, Australia,” Energy Policy 72 (September 2014): 14-22.

Authors: Greg Buckman is a PhD Scholar at the Australian National University’s College of Medicine, Biology, and Environment and formerly with the Australian Capital Territory’s Environment and Planning Directorate.  Jon Sibley is a Senior Manager with the Australian Capital Territory’s Environment and Planning Directorate. Richard Bourne is a Policy Officer with the Australian Capital Territory’s Environment and Planning Directorate.

Note: This is article is part of an ongoing series of concise summaries of interesting and important conclusions from new research and peer-reviewed journal articles. This series at Full Spectrum is written in partnership with Observatorio de las Ideasa Spanish-language publication which finds and summarizes important, cutting-edge ideas for policy makers, business leaders, and others on key topics like energy, health care, economics, and more.