How Auctions Can Distribute Risks More Equitably and Maximise Benefits

Renewable energy has seen remarkable progress over the past decade. In 2024 alone, the world added 15% more capacity than in 2023--around 582 GW of renewables, which accounts for over 90% of total power expansion globally in 2024.

While many policies and enabling conditions-financing, industrial policy, permitting, to name a few-are responsible for this progress, much can be said about the pivotal role of auctions in the accelerated deployment of renewable energy.

Today, auctions have become the leading procurement method for renewables-based power globally. More than a way to just deploy renewable electricity, auctions determine who carries the risks, who gets paid (in which currency, when and for how long), and what benefits countries can reap beyond the megawatts generated at the lowest price.

How auction design choices determine who bears the risks

By enabling competition, auctions have helped discover real prices, reduce costs and bridge information gaps between governments and market players. They also drive renewables deployment in countries or areas with high risks; real or perceived.

However, the prevailing auction model used in these contexts-mostly emerging markets and developing economies (EMDEs)-should be looked at more closely. In many EMDEs, auctions have often been implemented using a package of financial instruments that mitigate risks for investors and developers, but potentially limit long-term sustainability and local value creation.

This is usually due to the following features applied in the auction model:

• hard-currency (e.g. USD/EUR) power purchase agreements have helped to attract international lenders and developers, but they can be fiscally burdensome for host country governments in the long run due to risks such as currency depreciation. Host countries shoulder the risks of depleting currency reserves and can plunge deeper into debt.

• sovereign guarantees formally oblige the host country government to compensate the project investors if certain risks are realised (such as currency inconvertibility). They are (or can be) treated by the International Monetary Fund (IMF) as a liability, leading to raised borrowing costs for the government.

• award criteria weighted heavily (and in many cases, only) towards lowest price, which can favour foreign ownership and reliance on imported equipment and services, often with limited attention to local value creation.

When such design elements are applied in auctions, private actors are usually protected from the biggest uncertainties (e.g. currency risk), while governments and citizens shoulder most of the risks. For a renewables project to be sustainable and generate benefits to a country or community, auctions must be designed to distribute risks equitably, rather than being simply a procurement tool that attracts private capital.

The question now is: how should auctions be designed to avoid overburdening host country governments while supporting their socio-economic goals? The answer is not a one-size-fits-all solution, but lies in the selection of auction parameters that align with the public interest, national objectives and the country's macroeconomic conditions.

Each design choice must serve to allocate risks: not only to make the auction succeed at attracting investors and developers to compete towards low prices, but also at assessing the public sector's costs as well as the fiscal, social and developmental risks. The choice made for each auction design element shown below will have implications not just for auction outcomes, but also for the wider economy.

How auction design can lead to broader socio-economic outcomes

An example in Al Jouf, Saudi Arabia, shows a 2017 solar photovoltaics (PV) auction creating jobs in the region. The auction included a 30% local content requirement for services and equipment. By its completion in 2019, the Sakaka PV project achieved over 30% local content during the construction and development phases, with 90% of the workforce coming from Al Jouf.

A similar result was seen from Morocco's Noor-Ouarzazate solar complex, where 30%-35% of the project's components and services were sourced locally. Seventy percent of the project's workers, which included many women, were locally hired.

Some auctions can also include other requirements which direct project benefits towards the host community, for example in the form of clean electricity, shared revenues, or social services such as school, health care, water and sanitation. In the case of El Salvador's first solar PV auction (2012-2013), winning bidders were required to allocate 3% of profits to social development programmes in the cities where the projects were located.

The above examples show that in addition to achieving competitive prices, auctions can also be designed to address socio-economic challenges.

But this means shifting auction design from short-term profit objective to a long-term vision; to ensure risks and benefits are shared fairly, outcomes are sustainable, and projects maximise socio-economic benefits. When conditions are in place for countries to build robust legal and regulatory frameworks, sustainable balance sheets, skilled workforces, and resilient local industries, it will be easier to attract market players over time. So it is in everyone's interest to see auction design as a long-term strategy.

For more on the role of auction design in allocating risks more equitably to generate wider benefits, see Renewable energy auctions: Design for risk allocation.