Guide for Designing Contracts for Renewable Energy Procured by Auctions

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Aug 2020
Auctions to procure long-term contracts with Independent Power Producers are the most common instrument to scale-up the private investment and the deployment of renewable energy sources capacity in the Latin American and Caribbean (LAC) region. The great appeal of auctions derives from their ability to clear fair prices, and because they can be adapted to diverse market designs and recognize the intrinsic value of energy delivered in different areas and time. The auction design, however, is a complex task, that concerns the alignment of different elements such as the auctioned object, the participation rules, the bidding process, the winner definition, the setting price approach (pay-as-bid or pay-as-clear, for example), and, in the special case of procurement for long-term agreements, the contractual clauses. Therefore, the purpose of this guide is to provide knowledge-based support to practitioners involved in the design of energy auctions and power-plant projects targeting the increase in renewable energy sources diffusion. This includes public authorities, project leads, and investment officers for both the public and private sectors; lenders with a role in the design of project and business models; consultants or any third parties hired to carry out analyses for project feasibility and auction design. This guide is part of a broader effort in the energy division to collect and analyze auction results in the LAC, and also to place the auctions choice as a mechanism to incentive renewable energies in LAC.
This guide complements this effort by focusing on the design of the contract to be auctioned, and it proposes a check list of the key issues that policymakers need to answer when designing the process. Moreover, it suggests some best practices based on examples from previous experience.