Electricity Auctions

Electricity Auctions

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Virtually every country in the world faces the challenge of designing the regulatory and financial mechanisms that ensure cost-effective procurement of generation to supply electricity demand. Historically, procurement of generation has been particularly difficult in the emerging economies of Asia, Latin America and Africa. High and usually volatile load growth rates, limited access to financing and immature electricity markets have presented obstacles that have introduced challenges to the procurement process. More recently, environmental concerns regarding land use, impact on biodiversity, indigenous populations, and greenhouse gasses emissions have added layers of complexity.
Over the last 7 years, auctions for long-term electricity contracts have been getting increased attention within the electricity sector community as thet have emerged as a successful mechanism to procure new generation capacity. Among the reasons for such widespread interest is the large amount of capacity that has been already contracted from diverse technologies (conventional generation, large hydroelectric plants, renewable), under a variety of innovative auction arrangements and mechanisms, sometimes with multiple buyers and sellers taking part in the process. Auctions have been attracting a broad range of investors, from large established companies to new local and foreign independent power producers, and first-time power system investors.
This book presents a comprehensive overview of the international experience in electricity auctions, focusing on the procurement of long-term electricity contracts to foster new generation capacity. To this end, several relevant case studies were selected. While focus is given to emerging countries, insightful experiences from developed markets are reported as well. The book reveals the subtlety and complexity of trading and contracting for firm generation in the current power industry and the multiplicity of formats that the corresponding regulatory instruments may adopt. Lessons learned - both positive and negative - regarding policy formulation and implementation which should be of interest to policy makers, government authorities, regulators and power sector stakeholders.

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A WORLD BANK STUDY
Electricity Auctions
AN OVERVIEW OF EFFICIENT PRACTICES
Luiz T. A. Maurer
Luiz A. BarrosoWORLD BANK STUDY
Electricity Auctions:
An Overview of
Effi cient Practices
Luiz T. A. Maurer
Luiz A. Barroso
With support from: Jennifer M. Chang, Philippe Benoit, Daryl Fields,
Bruno Flach, Matias Herrera-Dappe, and Mario Pereira© 2011 The International Bank for Reconstruction and Development/The World Bank
1818 H Street NW
Washington DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
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1 2 3 4  14 13 12 11
World Bank Studies are published to communicate the results of the Bank’s work to the development
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ISBN: 978-0-8213-8822-8
eISBN: 978-0-8213-8824-2
DOI: 10.1596/978-0-8213-8822-8
Library of Congress Cataloging-in-Publication Data
Maurer, Luiz.
  Electricity auctions : an overview of effi cient practices / Luiz T. A. Maurer, Luiz A. Barroso; with support
from: Jennifer M. Chang .  .  . [et al.].
    p. cm.
  Includes bibliographical references.
  ISBN 978-0-8213-8822-8—ISBN 978-0-8213-8824-2
1.  Electric utilities. 2. Commodity exchanges. 3. Auctions. I. Barroso, Luiz A. II. Chang, Jennifer M. III.
Title.
  HG6047.E43M38 2011
  333.793′23—dc23
2011019447
4Table of Contents
FOREWORD ............................................................................................................................. vii
ACKNOWLEDGEMENTS ........................................................................................................ ix
EXECUTIVE SUMMARY ..........................................................................................................xi
1 Introduction .......................................................................................................................... 1
Objectives of this Report ..................................................................................................... 1
Approach .............................................................................................................................. 1
Who Should Read This Report? ........................................................................................ 2
Report Organization ........................................................................................................... 2
2 Auctions—Basic Concepts ..................................................................................................4
What is an Auction?.............................................................................................................4
Why Auctions? ..................................................................................................................... 5
Emergence of Auctions in the Power Sector: Historical Overview .............................. 5
Auction Design ..................................................................................................................... 7
Summary of Auction Designs .......................................................................................... 19
Outcomes of Well-designed Auctions ............................................................................ 20
From Theory to Practice ................................................................................................... 20
Auctions and World Bank Procurement Guidelines .................................................... 20
When Not to Use Auctions? ............................................................................................. 21
If Not Auctions—What are the Alternative Procurement Mechanisms? .................. 23
Negotiations ....................................................................................................................... 23
3 Electricity Auctions: Experiences in Di ff erent Jurisdictions ........................................27
Introduction ........................................................................................................................ 27
Classifying Country Experiences .................................................................................... 27
4 Auctions in Latin America ................................................................................................ 31
Brazil .................................................................................................................................... 31
Colombia ............................................................................................................................. 36
Chile ..................................................................................................................................... 44
Peru ...................................................................................................................................... 48
Panama ................................................................................................................................ 53
Central America ................................................................................................................. 54
Mexico ................................................................................................................................. 56
iiiiv World Bank Study
5 Auctions in Asia, Oceania, Europe, North America, and Multi-Country ................. 59
Asia and Oceania ...............................................................................................................59
Vietnam ............................................................................................................................... 59
Philippines .......................................................................................................................... 60
Thailand .............................................................................................................................. 61
South Australia ................................................................................................................... 61
Europe ................................................................................................................................. 62
North America ................................................................................................................... 65
Multi-country Auctions .................................................................................................... 73
6 Auctions and Renewable Energy Sources ...................................................................... 77
Overview: An Increasing Role for Renewables ............................................................. 77
Feed-in-Tariff s and Other Mechanisms to Support Renewables ................................ 78
Renewable Energy Auctions ............................................................................................ 80
Site and Technology-specifi c Auctions ...........................................................................89
7 Main Lessons ...................................................................................................................... 95
Auction-related Procurement and Energy Policy Aspects .......................................... 95
Market Context .................................................................................................................. 96
Foundations for a Successful Auction ............................................................................ 97
General Auction Design Issues ........................................................................................ 98
Technology Choice and Renewables 103
Implementation Issues and Participants ...................................................................... 103
8 Conclusions ...................................................................................................................... 107
APPENDIXES .......................................................................................................................... 109
Appendix A—Electricity Procurement ........................................................................ 111
Appendix B—The Use of Auctions in the Electricity Industry ................................. 119
Appendix C—Virtual Power Plant Auctions Around the World ............................. 125
Appendix D—Additional Experience with Renewables: FiTs and RPS .................. 130
Appendix E—Issues Related to Descending Clock Auctions ................................... 137
Appendix F—Approaches to Entertain Demand-Side Participation
in Energy Auctions ................................................................................................... 139
Appendix G—Competitive Electricity Procurement—Key A ributes ....................143
GLOSSARY .............................................................................................................................. 148
REFERENCES .......................................................................................................................... 152
Figures
Figure 2.1. Descending Auction Dynamics ..........................................................................10
Figure 2.2. Example of Hybrid Auction Dynamics .............................................................12
4Electricity Auctions: An Overview of Effi cient Practices v
Figure 2.3. Auction Result for Energy Delivery in 2012 .....................................................13
Figure 2.4. Bidding Activity for a Three-Round Internet-Based Auction ........................16
Figure 2.5. Simulating a Price Elastic Demand Function ...................................................18
Figure 2.6. Typology of Procurement Processes in the Energy Sector .............................25
Figure 3.1. Auctions: Objectives and Electricity Market Stage of Development .............28
Figure 3.2. Auction-based Procurement Schemes and Specifi cities ..................................29
Figure 4.1. Energy Auctions in Brazil ....................................................................................34
Figure 4.2. Energy Contracted and Average Price in Each
New Energy Auction (NEA) .............................................................................................37
Figure 4.3. Results of Technology- and Site (project)-specifi c Auctions ...........................38
Figure 4.4. Demand Curve for the Auction of Firm Energy Obligations .........................41
Figure 4.5. Descending Price Clock Auction with Intra-round Bids in Colombia ..........42
Figure 4.6. Chilean Auction Mechanism ...............................................................................46
Figure 4.7. Central America Regional Power Market .........................................................56
Figure 5.1. Downward-Sloping Demand Curve ..................................................................69
Figure 5.2. Demand Response Participation in RPM ..........................................................70
Figure 5.3. Characteristics of Nordic Countries 75
Figure 6.1. Historical Hydro Storage and Typical Wind and Bioelectricity
Production in Brazil ..........................................................................................................86
Figure B.1 Evolution of the Auction Discount (%) and Investment Cost per km
for the 500kV Transmission Facilities Auctioned ........................................................123
Tables
Table 4.1. Composition of New Capacity Off ered in the First Primary OEF Auction ....43
Table 4.2. Contracted Energy and Prices per Generator and Distributor ........................47
Table 4.3. Peruvian Energy Auction Results After 2009 ......................................................52
Table 5.1. Forward Capacity Market Results—ISO-NE 67
Table 6.1. Renewable Portfolio Goals for US States.............................................................79
Table 6.2. Peruvian 2010 Technology-specifi c Auction Results .........................................81
Table 6.3. The Proinfa Feed-in-tariff in Brazil ......................................................................84
Table 6.4. Results of the 2009 Wind Energy Auction in Brazil ...........................................89
Table 6.5. Rationale for Technology (and Site) Specifi c Auctions ......................................93
Table D.1. Overall Results of the Main Renewable Support Mechanisms in Brazil .....135
Boxes
Box 2.1. Role of Procurement in Ensuring Security of Supply ............................................7
Box 2.2. Experience with Hybrid Auctions ...........................................................................13
Box 2.3. What are the Basic Elements for a Successful Auction? .......................................21
Box 2.4. Is Competitive Bidding Always Appropriate or Desirable? ...............................22
Box 2.5. Multiple-Criteria Award System for a Competitive Bid ......................................23
Box 5.1. Demand Resources Participation in New England ..............................................67
Box 6.1. Reduce Reserve Price or A ract One More Bidder? ............................................91
4vi World Bank Study
Box A.1. Forward x Future (Financial) Energy Contracts ................................................113
Box A.2. Key Challenges for the Procurement of New Capacity in
Developing Countries .....................................................................................................115
Box B.1. Granting Hydro Sites and Oil Fields—Any Common Denominators? ..........122
Box D.1. Clouds Over Spain: Solar Feed-in-Tari ff to be Slashed by up to 45 Percent ..131
Box F.1. Online Reverse Auctions to Award Energy E ffi ciency Grants .........................141
Box F.2. Demand Response—An Orphan in Wholesale Market and
Auction Design .................................................................................................................141Foreword
atin America has been leading the eff ort to introduce electricity auctions as an instru-Lment to promote competition in electricity procurement. Dozens of auctions have
been carried out to date, with noteworthy results particularly in terms of procuring new
generating capacity.
The region has conducted a wide range of auctions both “in the market” and “for the
market”—from technology-specifi c, to project-specifi c and even full competitive pro-
curement, where all technologies compete head to head—encompassing a wide variety
of products, from traditional generation forward purchase contracts to more sophisti-
cated electricity call options. Other parts of the world have also implemented auctions,
including for capacity payments in electricity markets in the Eastern US, and for trading
production rights of power plants in Europe.
Approximately 40 electricity auctions have been conducted over the past 10 years in
Latin American countries, mostly in Brazil, Chile, Peru, Colombia, and Panama. Brazil,
for example, has successfully conducted about 30 auctions for existing and new electric-
ity generation. As of April 2010, approximately 57,000 MW of new capacity have been
contracted for delivery dates ranging from 2008 to 2015, with contract terms ranging
from 15 to 30 years and including a wide variety of technologies.
There is increasing interest among World Bank client countries to learn more about
electricity auctions as tools for procuring additional electricity generation capacity. In
response to client needs, and given the wealth of experience that has recently emerged
over the last few years, we felt that the time was ripe to compile the di ff erent experiences
from electricity auctions and to try to extract lessons learned and best practices. To this
end, the report provides a description of several relevant experiences with auctions for
electricity, as well as a discussion of the lessons learned regarding policy formulation
and program implementation.
One lesson that emerges is that details clearly do ma er: every design has to be
adapted to the specifi cs of each power system. A ention should be paid to a variety of fac-
tors, including the government’s policy objectives, the degree and nature of competition
in the electricity market, the interest and prospective role of the private sector, the avail-
ability of generation, the variety of di ff erent technologies, and the existing regulatory and
institutional frameworks in which the suppliers will operate, both for the auction itself and
subsequently. Despite the importance of this type of specifi city, the report is not meant
to be a “how-to” manual on auction implementation. Our goals are more modest for this
report and subsequent studies will certainly be useful to help guide policy makers and
other actors in the sector.
We hope that this document serves to disseminate knowledge about some of the key
issues and options pertaining to electricity auctions. It is also our hope that the informa-
tion and analyses set out in this report will benefi t World Bank client countries, as well
as energy specialists in all countries, in gaining an appreciation for the challenges that
may lie ahead, and the potential benefi ts of implementing electricity auctions to enhance
power sector competitiveness.
Philippe Benoit
Sector Manager, Energy
Sustainable Development Department
Latin America and the Caribbean Region
World Bank
vii
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