Reverse auctions are proving to be more than just a trend in solar development. How can the players involved stay competitive, and profitable in a market, where seemingly anything goes?

 

Often lauded as a way to phase out government involvement in solar pricing, reverse auctions are fairly simple; the energy buyer sets an opening bid, and competing developers try to outbid each other’s prices by offering lower rates. In other words, the power of capitalism will reveal the true lowest cost of renewable energy.

While these auctions have indeed resulted in historically low rates, many in the solar industry are aghast at just how low they have gotten. Now, it is prudent to ask if the practice has necessitated a new role for government intervention — this time as a regulator.

In April, renewable energy analysts were “stunned” when Mexico’s first foray into renewable auctions resulted in a record-low price of $50.7/MW. This record would not last long, as the epidemic spread. An August auction in Chile resulted in $29.1/MW. September action in Abu Dhabi came in at a ridiculously low price of $24.2/MW. These low bids are often under today’s solar LCOE, which begs the question: can these projects actually be realized?

It should be of concern that many companies are bidding to sell at less than their current costs. A recent PVTech piece examined this phenomenon as it pertains to the Indian market — a rich yet developing market where solar auction prices are already threatening coal.  It’s difficult to determine the developers’ reasoning for such bids, but analysts have postulated a few possible motivations.

Some bidders may simply believe that the current trend of plummeting solar technology is sure to continue — by the time they move to construction, they will be able to squeeze a profit out of their lowball bids. Other developers might see these bids as an opportunity to expand their solar portfolio — the rationale being that they can secure cheaper capital with a more diverse portfolio which will offset the possibility of business losses with the projects themselves.

The problem is that neither of these scenarios represent healthy growth for the solar industry. Building project economics on a foundation of extremely optimistic (however likely) cost projections is always risky. Furthermore, waiting for costs to go down incentivizes the developers to delay projects in order to make them profitable. Conversely, planning for unprofitable projects does not instill confidence that they will be delivered as expected, if at all.

The end result is that these projects are born at risk. Since developers able to abandon them without penalty, the likely victim of this risk is the customer. As a buyer, cheap is good, but not if your order never arrives. Many are grumbling about the need for regulation to keep the developers honest and the bids reasonable — one particularly practical idea is temporarily banning developers who cannot deliver from participating in future auctions. This would curtail reckless bidding, without undermining the spirit of the bidding process by enforcing a floor.     

Clearly, the practice of reverse bidding has some kinks to work out. While it does this, investors must be able to determine which bids are reasonable and which are not, as a bid that can be realized in one area of the world may be at risk in another. Trying to keep track of these nuances without the aid of a quality data management system may result in that risk making its way into your portfolio. From the moment that a project is conceptualized, bid on and goes into development, financial decisions mush be made every step of the way. Maintaining project data integrity is crucial to mitigating risk from the start, and helps everyone from development, to engineering and construction, down to asset management, carrying projects successfully to term — while still meeting expectations for high returns.