Renewable Energy Auctions: Brazil

Overview

In renewable energy auctions, a government issues an open call to developers to submit bids for offtake contracts, usually structured as fixed-price power purchase agreements (PPAs). In general, the lowest price per unit of renewable electricity wins, incentivizing developers to build projects and produce clean power as cheaply as possible.

In many countries, these competitive bidding processes are the primary route to market for utility-scale projects, offering offtake contracts or grid access through competitive allocation.

This system offers benefits to all parties involved. For project stakeholders, PPAs provide revenue certainty, as the developer knows how much they will be paid for their power for a fixed number of years into the future. When auctions are scheduled on a consistent and reliable basis, with clear timelines and transparent award criteria, they can improve investor confidence in financing renewable energy projects.

At the same time, auctions allow governments to better control their spending and competitively allocate capacity, rather than simply supporting all projects that meet eligibility criteria. And competitive allocation through auctions typically produces tariffs that better reflect trends in technology costs.

Impact

Brazil’s pioneering use of competitive auctions to procure clean power has paved the way for massive uptake of renewables in the country. Since 2007, when the first such auction was held, Brazil has contracted over 33 gigawatts of renewable capacity, growing its annual renewable energy generation eightfold. The country’s auctions have also accelerated private investments, with the market attracting over $200 billion in clean energy project funding, including significant volumes of cross-border investment, over 2007-2023.

Brazil’s policy has succeeded by establishing clear rules under which developers operate. It allows the market to function freely by not setting unreasonable caps on the prices developers can bid. The timing of the auctions and the volumes of power they sought to contract have been generally well calibrated to match Brazil’s growing demand. And auctions were also held consistently, regardless of political changes within the country. The system was paused only in 2023 as corporate PPAs gained traction, negating demand for new auction rounds.

The first dedicated onshore wind auction in Brazil, which took place in 2009, awarded contracts at a price of $84.8 per megawatt-hour (MWh). At the time, the technology was not competitive with conventional sources, and the higher price was crucial to for investors to hit their required returns.

Fast-forward almost 15 years, and the latest renewable auction in Brazil for the technology closed at $33.1/MWh. The trend for solar was similar: prices declined to $32.2/MWh in 2022 from $86.7/MWh in 2014. In the last auction, solar prices were even lower than those for wind projects. This goes to show just how powerful early government support can be in getting new technologies off the ground.

An important aspect of Brazil’s program is that renewable energy projects secure PPAs for a fixed volume of power generation on a monthly basis. This means that if projects under-deliver on their expected output, the supplier must make up the balance through purchases on the spot market. This incentivizes developers to invest with sufficient generation in mind, rather than just increasing capacity.

In conjunction with these auctions, Brazil established incentives specifically intended to create local manufacturing bases for wind and solar equipment. While complying with local content measures was not mandatory, doing so gave developers access to concessional debt from the development bank. To receive discounted financing from state-run Brazilian National Development Bank (BNDES), developers that won contracts under state-organized auctions agreed to use certain amounts of locally sourced equipment. This stands in contrast to many emerging wind markets that take a more stick-like approach, demanding that firms must meet local-content requirements to participate in auctions.

That said, such local content requirements should be carefully implemented, as poor design can undermine deployment outcomes while fostering domestic industry. As Brazil’s clean energy sector matured, local content requirements to access these incentives were progressively eased.

Opportunity

Many governments procuring renewable energy are adapting the design of auction programs to the evolving realities facing power systems with higher penetrations of variable clean power supply.

As the share of variable renewables in the system grows, introducing time-of-day or peak load requirements can be one option for delivering clean power in a way that best meets grid needs. Chile, for example, has held technology-neutral auctions to supply power during specific periods of the day since 2014, prioritizing solar during a designated daytime block of demand while other technologies serve evening demand. In India, firm requirements were introduced to a peak power supply auction in 2020.

Accommodating co-located renewables (storage systems incorporated into wind or solar generation projects) and oversized renewable energy projects within auction schemes can help to deliver better outcomes for the grid and for generators by maximizing the utilization of a grid connection and smoothing the output from a wind or solar project. Co-located wind and solar auctions have been used since 2018 in India with fairly successful results.

It’s not just the combination of technologies sought in auctions that is changing. In Europe, new schemes are putting caps on generator payments during periods of negative prices on the wholesale market, and tariffs are being granted for shorter periods than in than older schemes. Such designs allow market signals to be passed on, to a greater or less extent, to generators with auction contracts. The governments seek to incentivize new build while keeping subsidy costs down, but this also decreases revenue certainty for investors and can increase reliance on the project’s merchant tail to recoup costs and raise the costs of capital for renewable energy projects.

Source

BloombergNEF, BNDES