Design of renewable energy auctions

Renewable energy auctions are, by far, Latin America’s most widely used policy instrument
in the promotion of renewable electricity (IRENA, 2016). Brazil, Chile, Peru and Uruguay were early adopters, while Argentina, Chile and Mexico have innovated auction designs more recently. In 2019, Colombia became the latest adopter, driven by the success of auctions in the region (IRENA, 2019a; Viana, 2020).The instruments that preceded renewable energy auctions were insufficient to attract non-hydro renewable energy development on a large scale, as they did not include long-term energy contract mechanisms.

The growth in electricity demand is a matter of concern for policy makers and system operators.Electricity consumption grew apace with the country’s economic performance between 1990 and 2017, increasing by 151. The analysis of auction design elements that
follows adheres to IRENA’s framework (IRENA, 2019a; IRENA and CEM, 2015), which classifies
design elements into four categories: 1) auction demand, 2) qualification requirements and
documentation, 3) winner selection and contract award process, and 4) risk allocation and
remuneration of sellers.

AUCTION DEMAND Product and volumes Energy (measured in MWh), not installed capacity (measured in MW), has been the product auctioned in Colombia’s two renewable energy
auctions to date. Auctions of energy are in line with an energy constrained system’s needs, as
additional MWh can reduce the stress on water reservoirs during extreme climate conditions such as el Niño.Such auctions are increasingly common in Latin America, though installed apacity auctions remain the rule globally.

The Colombian renewable energy auctions are stand-alone, meaning that each is organise
individually, with no commitment to future bidding rounds. This includes plans to launch a
new auction in 2021.

QUALIFICATION REQUIREMENTS AND DOCUMENTATION
Project-related requirements Strict or overcomplicated qualification requirements and documentation can reduce investors’ interest in participating in an auction. But if requirements are too lax, project completion and performance can be compromised (IRENA, 2019a). Colombia’s first auction had more complicated qualification requirements than the second one.

RISK ALLOCATION AND REMUNERATION OF SELLERS
Commitment bonds Guarantees in the form of commitment bonds are often introduced in auctions to minimise the incidence of undercontracting and underbidding (see chapter 2 of IRENA, 2019a), and the Colombian auctions were no exception. A commitment bond may be crucial to ensuring an auction’s success and discouraging the underperformance of a project, but if its terms are too strict, the bond requirement may also discourage some participants from entering the auction.

Renewable energy auction results

Colombia conducted two renewable energy auctions in 2019. The first, in February 2019,
assigned bids between buyers and sellers, but did not award any contracts because
competition criteria were not met . Participation rates were promising, however, leading authorities to accelerate discussions on holding a second auction.

PARTICIPATION AND COMPETITION
As noted, the first auction successfully assigned bids, but did not award any contracts because
the criteria related to market concentration and dominance were not met . Yet even so, policy makers were encouraged by the interest that private players had demonstrated in renewable energy auctions, leading them to accelerate discussions on holding a second auction.

though the bonds had been revised downward from the first auction and were required only after qualification they remained a barrier to participation.

capacity of solar PV and wind 40-fold by 2022, compared to 2019 (MME, 2019g). They should also accelerate the diversification of Colombia’s generation mix, as, according to the MME, they will help increase non-hydro renewable energy participation from less than 1% in 2019 to about 12% by 2022.

PRICE OUTCOMES Initially, the weighted average price for five wind projects was COP 95.2/kWh (USD 27.70/ MWh) and COP 97.6/kWh (USD 28.40/MWh) for three solar PV projects.

for other slots (Sanclemente, 2019). In contrast, wind power developers seem to have adopted
a riskier position by submitting most of their bids for the first two time slots. They therefore expected to supply electricity in the evening from the spot market at potentially higher prices
(Manrique, 2019).

Factors affecting prices

As discussed above, the prices awarded in Colombia’s second renewable energy auction
were not only competitive globally, but also within a resource-rich region with low soft costs.

COUNTRY-SPECIFIC CONDITIONS
Potential of renewable energy resources Colombia is near the equator and is rich in solar
radiation. Nonetheless, only three of the nine awarded projects are solar PV. The six awarded
wind projects are all in the northern state of La Guajira, an area with exceptional wind resources.

Conclusions

Colombia’s liberalised and unbundled electricity market was not conducive to the deployment of large-scale non-hydro renewable energy. But diversification of the country’s hydro-reliant
electricity sector has become increasingly relevant to guard against power shortages tied to the effects of weather and climate on the water supply. In view of Colombia’s vast and cost-competitive wind and solar resources, the share of solar and wind energy in the country’s generation mix could be substantially increased by 2030 from its meagre share of 0.08% in 2018. Raising the share will depend critically on investments in the transmission grid (IRENA, 2018a).

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