To Auction, Or Not To Auction? Target Is 60 GW From Renewable Wind Energy

To Auction, Or Not To Auction? Target Is 60 GW From Renewable Wind Energy

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.

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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. Read More

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