Reverse Auction Mechanism
A reverse auction mechanism is an auction approach to procurement, wherein sellers which meet certain minimum criteria are eligible to submit non-negotiable price bids. The buyer (typically a utility) then selects winning sellers based on the lowest priced bids first, and signs non-negotiable standard contracts with the winning sellers, incorporating the prices bid by that seller.
How does the Reverse Auction Mechanism work?
Essentially, an auction is held to such that developers of system-side renewable distributed generation projects bid the lowest prices they would be willing to accept to develop renewable energy projects.
The projects are then scrutinized to ensure they meet the minimum project viability requirements. Typically these programs have a standard-offer contract, to streamline the process and ensure developers are aware of the terms and conditions, and can bid their projects accordingly.
Why is the Reverse Auction Mechanism important to solar?
While the concept of a reverse auction mechanism is not new, it is a fairly new approach for procuring renewables. Where it has been deployed, it has been used as a way to let the competitive market determine the price paid for renewables. This is very attractive to policy makers, as developers are paid a price that is sufficient to bring projects online, but also provide ratepayer protection against “overpayment”. However this approach does lead to developer risk and uncertainty – as there is no guarantee that the bid and project will be successfully contracted.