Investments, are needed to decarbonize the power system. One of the way for investments to come is through renewable energy auctions. Currently, there are 3 types of renewable energy auctions, sealed bid, descending clock and auctions. This
article serves as a base to describe the means of describing energy auctions, its best practices in SEA, and recommendations for renewable energy auctions in Indonesia.
A. Investment, Renewable Energy Auctions and Its Mechanism
To attain the climate target through the decarbonization of the power system, substantial investment in renewable energy generating units is imperative. This holds true for Indonesia as well. The Ministry of Energy and Mineral Resources (ESDM) has delineated the necessity of an annual investment amounting to 30.4 trillion Indonesian rupiah to achieve a 23% renewable energy target by the year 2025. Quoting the Indonesia Institute for Sustainable Development (IISD), the actual investment in renewables stood at an average of 23 trillion Indonesian rupiah over the past six years, spanning from 2015 to 2021, which was 15% below the targeted investment figure [2]. In light of these statistics, it becomes evident that Indonesia requires more diverse investment mechanisms, particularly in the realm of power generation, to meet the investment target essential for fulfilling the stipulated climate objective.
These investments can be channelled into the power sector through renewable energy auctions. Renewable energy auctions offer a medium for attracting investments, both domestically and internationally, aimed at the development of renewables generating units, to align with the trajectory of the power system decarbonization. Furthermore, auctions also facilitate the selection of renewable energy projects for development, based on prospects encompassing production costs, reliability, technicality, and environmental impact. Below, are the general simplified steps of renewable energy auctions.
Auction is Announced and Opened- Typically, the government or relevant entities describe and schedule auctions, listing the available capacity, technology type, and date of renewable energy auctions.
Bidding Phase- In this stage, developers or investors have the opportunity to bid on the capacity by submitting proposals containing a feasibility study. This study typically comprises of engineering design, economic viability analysis, environmental impact assessment, and benefit creation aspects.
Evaluation Phase-The bid submissions are then reviewed by the government or other auction moderating bodies to assess their alignment with policy frameworks.
Winner Selection and PPA-The winner of the auctions is announced and continues with the agreement to sign a power purchasing agreement (PPA). The end of the auction process and the signing of the PPA, is an agreed statement that the renewable generators will be developed, or in other words, the inclusion of renewables infrastructure investment in the power system landscape.
Presently, three auction mechanisms are employed in the market: sealed bid auctions, descending clock auctions, and hybrid auctions [2].
Sealed bid auctions: as implied by their name, involve renewable energy auctions that are sealed or non-disclosed. In this mechanism, developers submit their bids in a closed manner, without knowledge of other developers’ bids. If the determination is price-based, the government can rank winners based on the lowest LCOE cost to fill the prioritized capacities. Furthermore, depending on the project’s scale, the government typically requests a pre-qualification process to enable the selection of projects with portfolios meeting the standards for auction participation [1].
These types of acutions, possess advantages, including the customization of winner selection criteria. This capability arises from the fact that only the moderator is privy to the criteria for selecting a winner, enabling the tailoring of these criteria to meet specific aspects of the policy. For instance, in a scenario involving projects A and B, each bidding at rates of 10 USD per kWh and 12.5 USD per kWh respectively, if project B commits in its operational plan to employ 25% of its workforce from the local population, it could be selected as the winning bid even if project A offers a lower price. This is a demonstration of how the policy direction, emphasizing job creation and social welfare, can influence the choice of the winning bid. This example illustrates just one of the numerous prioritized criteria. Factors such as contractor reliability, portfolio strength, environmental sustainability, and other aspects can be collaboratively considered to determine the winning bid in this auction. Conversely, in terms of drawbacks, the closed nature of these auctions leads to a lack of transparency in the eyes of the public, potentially leaving room for nepotism to influence the selection of a project from a particular party
Descending Clock Auction: In this auction mechanism, the bidding process extends beyond a single round. In the initial round, the moderator announces the desired quantity and price for the offtake of renewable energy generators. For instance, the moderator establishes a price of 15 cents per kilowatt-hour (kWh) as the intended price for renewable energy offtake. Consequently, considering individual economic considerations, investors are able to bid for the supply of this capacity at a price of 10 cents per kWh. For instance, developer A could secure 40 MW at this price, while developer B could secure 45 MW. However, it becomes evident that the developers require a total capacity of 100 MW.
Subsequently, in the second round, the auctioneer incrementally raises the price for the offtake of renewables (e.g., to 17 cents per kWh), enabling both developers A and B to expand their respective capacities until the desired 100 MW capacity is achieved. Conversely, if the price remains at 15 cents per kWh and the auctioneer requires an additional capacity of 100 MW, and both developers A and B are willing to supply 75 MW each, the cost can be lowered on the second round, for instance, to 10 cents per kWh. This adjustment allows both developers A and B to fulfill the required capacity at 75 MW while the off-taker, benefits from the more economical price.
The advantage of these types of auctions lies in their ability to determine the most economically viable pricing for the development of renewable energy. Moreover, disclosing the pricing, ensures transparency regarding which investors are bidding and at what price and capacity they can afford. However, this advantage can also present a double-edged sword. Developers may engage in a competitive race to drive down electricity generation costs. To a certain extent, this cost reduction competition may lead to compromising the quality of components, safety protection systems, and other critical aspects. Moreover, due to the winner selection being exclusively predicated on price and capacity, the opportunity for integration to incorporate various other aspects in determining the auction winner based on policy fundamentals is precluded. [1]
Hybrid Auctions: Hybrid auctions integrate features from both sealed bid and descending clock auctions, featuring a two-phase approach. The initial phase utilizes descending clock auctions to ascertain prices and capacity at which off-takers can acquire electricity. If satisfactory prices and capacities are achieved in adherence to descending auction protocols, the auction proceeds to the second phase. In this subsequent stage, the sealed bid mechanism is implemented, wherein each bidder confidentially submits bid documents to the auctioneer for further assessment. The intent of hybrid auctions is to combine the advantages inherent in both models, encompassing the price discovery aspect from descending clock auctions and the winner determination based on policy guidelines found in sealed bid auctions. However, it is important to note that the downside of hybrid auctions lies in the protracted administrative procedures, thereby elongating the procurement process [1].
Within this article, as implied by the title, we delve into the introduction of renewable energy auction concepts. Subsequently, we will examine a case study of renewable energy auctions in neighboring countries. Following this, we will unravel the mechanisms governing renewable energy auctions in Indonesia. Lastly, recommendations will be offered to enhance the efficacy of renewable energy auctions in Indonesia.
B. Example of Renewable Energy Auctions in Neighbouring Countries – Malaysia
Malaysia stands as a notable Southeast Asian nation that has achieved considerable success in the realm of renewable energy development. A prominent illustration of this success is the Large Scale Solar (LSS) auction, conducted over four rounds, which effectively attracted substantial investments across the auctions held in 2016, 2017, 2020, and 2021 [3].
In comparison to other Southeast Asian countries, Malaysia has conducted the highest number of auctions from 2016 to 2021, accumulating a total capacity of 2.26 GW. This surpasses the capacities of the Philippines at 2.2 GW, Myanmar at 1.5 GW, and Indonesia at 1.1 GW in terms of successful auction outcomes from the year 2016 [3].
Several factors have contributed to the notable success of renewable energy auctions in Malaysia. First and foremost is the clear and streamlined qualification process. All registration and application procedures are conducted online, and the website hosts comprehensive documentation and information regarding the schedule of upcoming auctions, along with guidelines of auctions up to project completion.Moreover, developers are facilitated in a transparent manner concerning the connection points with state-owned utility enterprises. The auctioneer, the Malaysian Energy Commission, meticulously analyzed potential connection points to the transmission and distribution networks in collaboration with the National Electricity Ltd. (Tenaga Nasional Berhad – TNB) and Sabah Electricity Sdn Bhd (SESB). In their Request for Proposal (RFP) documents, bidders were provided with a list of connection (nodal) points from which they could choose. This facilitated bidders by granting them prior knowledge of feasible interconnection locations for their power plants.
In terms of mechanism, Malaysia has established a distinctive approach, characterized by a singular round of auctions akin to sealed bid auctions, as opposed to a multi-phase bidding approach like descending clock auctions. In this context, the auctioneer disclosed information regarding the reference price at which the power offtaker intended to procure the energy. It is noteworthy that the reference price for large-scale solar was set at MYR 0.41/kWh (USD 105.3/MWh). This valuation was based on a market estimate for the relevant technology, encompassing associated connection costs. Bidders, within this framework, were allowed to submit bids at their discretion; however, the auctioneer explicitly retained the right to reject any bid exceeding the stipulated reference price.
Furthermore, within the framework of the LSS auctions, Malaysia has implemented a regional segmentation based on capacity. The auction is divided into 2 regions, and for one given region, is divided again based on capacity: small-scale (below 5 MW), medium-scale (6-30 MW), and large-scale (30 to 50 MW). As illustrated, Region P, representing the Peninsular, is partitioned into three distinct auctions based on capacity, mirroring a similar approach for Region S, denoting Sabah or Labuan. This segmentation proves advantageous in controlling the injection of intermittent solar power into the grid effectively. Additionally, it offers newfound developers a beneficial opportunity to participate, given the availability of auctions catering to smaller capacity ranges.
Moreover, in determining the auction winner, Malaysia employs four distinct elements, each carrying a specific weightage. These elements encompass plant size, land utilization, local content, and social benefit. The cumulative weightage of these elements is incorporated into the subsequent equation to ascertain the project with the lowest score, which is then selected.
Score = price offered x (100-total merit score)/100
It is important to emphasize that, within the criteria for selecting the winner, although cost serves as a multiplier, social benefit holds considerable significance in the realm of renewable energy development. Thus, it ensures that the renewable energy projects being developed also contribute to the local economy.
C. Renewable Energy Auctions in Indonesia
Currently, Indonesia is engaging in renewable energy auctions through a sealed bid format, orchestrated and executed by the state-owned utility, Perusahaan Listrik Negara (PLN). The auction mechanisms are described in the pertinent regulations, specifically Minister of Energy and Mineral Resources Regulation No. 10 of 2017, concerning the fundamental principles of power purchase agreements (PPA), and PLN Director Regulation No. 0062/DIR/2020 regarding the procurement of electricity from renewable energy power plants.
In order to partake in these auctions, investors or development companies must be registered as Qualified PPA Participants (DPT) with PLN or registered selected providers. Attaining DPT status necessitates compliance with qualifications related to historical technical experience, financial capabilities, and administrative documentation. Only those designated as DPT are privy to information regarding the timing, location, and capacity of the power plants set for auction.
Presently, the tariffs at which renewable energy power plants are offtake by PLN, are governed by Presidential Regulation No. 112 of 2022. The adopted pricing mechanism for renewable energy in Indonesia is defined by what is known as ceiling tariffs, which impose ceiling tariffs that define the maximum price at which the off-taker will purchase electricity per unit. These ceiling tariffs vary across different technologies and are influenced by the geographical area in which the plant is developed. The implementation of ceiling tariffs is instrumental in preventing the over-incentivization of renewable energy generators.
The renewable energy auctions in Indonesia resemble those found in other regions utilizing the sealed bid auctions. The initial stage involves the opening of the auction by PLN, followed by bid submissions by DPT in the second stage. During this bidding phase, developers provide a grid study (proposing an interconnection point) and a study outlining the integration of renewable energy into the PLN network, along with a feasibility study encompassing detailed engineering design, economic viability, and environmental impact analysis. Subsequently, in the third stage, PLN conducts due diligence based on the feasibility study and submitted bids, culminating in the selection of the winning bid. In the fourth phase, both PLN and the developer submit a letter of intent to the Ministry of Energy and Mineral Resources for the execution of the PPA. Finally, in the fifth and last stage, upon approval from the Ministry of Energy and Mineral Resources, the PPA is formally signed.
D. Recommendations and Conclusion for Renewable Energy Auctions in Indonesia
Drawing from the case study and an overview of the renewable energy auction mechanisms in Indonesia, the ensuing segment presents recommendations and conclusions derived from the organization of renewable energy auctions that can be implemented within the Indonesian context.
Clear Auctions Schedules-Different to countries like Malaysia, which conduct systematic and scheduled auctions, the application in Indonesia differs significantly. In Indonesia, renewable energy auctions(as discussed previously) tend to lack a systematic schedule and lean towards ambiguity. This implies that only a select few parties have knowledge of when and which projects will be presented in the power auctions. In this context, implementing scheduled auctions can provide better control over the injection of renewable energy power into the grid, allowing system operators the necessary breathing space to strengthen the grid. Scheduled auctions also ensure supply security by balancing the introduction of renewable generators based on their types into the grid. For instance, auctions for geothermal power and hydro can precede others due to their slower construction and exploration phases, followed by auctions for variable renewables. The time gap between dispatchable and variable renewables auctions enables a balanced penetration of renewable energy, facilitating the introduction of solar or wind power plants alongside online adjustments for hydropower or tidal power plants to align their output with the intermittent conditions of the two generators.
Transparency in the scoring mechanism, and introduce new methodology with score weights that favors other factors other than prices-Presently, there exists a notion of transparency in the selection process for auction winners in the context of renewable energy. This opacity raises skepticism among developers and the public regarding the possibility of favoritism toward specific parties in renewable energy auctions. Furthermore, the public’s skepticism is exacerbated by the irregularity and apparent disorganization of information regarding the timing of these auctions. In addressing this matter, PLN and the Ministry of Energy and Mineral Resources (Kementerian ESDM), as the two primary actors in these auctions, can promote transparency concerning the organization of renewable energy auctions. Such efforts may include regular announcements of the auctions in newspapers and other mass media outlets. Additionally, while both the Ministry of Energy and Mineral Resources and PLN determine auction winners based on parameters that are currently unclear, and presumably centered around pricing. Thus, based on the case study in Malaysia, we can suggest implementing a weighted scoring mechanism, which does not relies solely on cost, but several matter such as local content, developer portfolio, value creation and social acceptance.
Offgrid or small scale renewable energy auction-While large-scale utility auctions offer significant advantages, there are numerous prerequisites or high entry barriers that impede medium to small-scale developers from participating in these auctions. Consequently, they are unable to engage in utility-scale auctions. In response to this challenge, the creation of renewable energy auctions for small-scale , or distributed off-grid projects is proposed. This proposition stems from the fact that, despite Indonesia’s electrification rate of 99%, it inadequately represents the electrification status in the Sulmapana region (Sulawesi, Maluku, Papua, and Nusa Tenggara), where electrification rates are lower (at roughly 80%). Privatization through renewable energy auctions by private entities could assist in addressing this low electrification. Not only can such auctions aid Indonesia in achieving 100% electrification, but they can also enhance the affordability of household-scale battery systems. Furthermore, these auctions can serve to elevate the level of experience among medium and small-scale developers, enabling their meaningful participation in grid-scale renewable energy auctions.
Conclussions
Following a comprehensive discussion concerning renewable energy auctions, associated concepts, and the case study in Malaysia, it appears that Indonesia requires substantial attention and efforts to enhanced its auction mechanisms. This entails enhancing transparency, clear scoring mechanism, along with smaller scale & off-grid renewable energy auctions. The implementation of such improvements not only promises an augmented integration of renewable energy sources but also assures cost-efficiency and better regulation of renewable energy influx. Consequently, this allows utility companies ample time to reinforce the grid effectively. Moreover, by incorporating a scoring system based on social benefit, it ensures that the development of renewable projects maximally impacts the socioeconomic well-being of the local populace.
Author: Aditya Perdana
Sources :
IRENA. 2016. Renewable Energy Auctions in Developing Countries. International Renewable Energy Agency – Abu Dhabi
IISD. 2022. Using Public Funding to Attract Private Investment in Renewable Energy in Indonesia. International Institute for Sustainable Development
IRENA. 2022. Renewable Energy Auctions in South East Asia. International Renewable Energy Agency – Abu Dhabi
PLN Director Regulation 0062/DIR/2020 – Procurement of Electricity from Renewable Energy Power Plants
Ministry of Energy Regulation No. 10 the Year 2017 – Fundamental Principles of Purchasing Agreemant
Presidential Regulation. No 112 The Year 2022 . Renewable Energy Accelaration
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