How to make renewables auctions resilient to supply chain shocks

Renewable energy auctions can help to manage immediate supply chain shocks, according to a new report from the International Renewable Energy Agency (IRENA).

The agency’s latest report says renewable energy supply chains have been “a source of systemic vulnerability” through the 2020s with a series of overlapping shocks, most recently including the Strait of Hormuz crisis, raising costs, delaying projects and straining finances.

The report says that while supply chain shocks can impact renewable energy auctions across different procurement stages, manifesting as undersubscription, lower actor diversity, higher bid prices and lower project realisation rates, governments can design auctions to mitigate these impacts.

IRENA cites measures including extended lead times, graduated bonds and penalties as mitigation measures but lists contact indexation as the key immediate-term design response.

“Indexation entails revising the remuneration of sellers to account for inflation or unforeseen cost increases. While lead time extensions can assuage delivery delays, and adjustments to bonds or penalties can reduce the financial consequences of noncompliance, neither directly addresses the underlying shock,” the report explains. “By contrast, well-designed indexation can potentially allocate clearly defined external cost risks among project owners, off-takers and consumers in a more transparent and rules-based manner.”

IRENA then advises that the extent to which these costs are absorbed by project owners, off-takers or governments, or passed on to consumers, is a policy choice for host-country governments.

The report also points towards local content requirements as a way to support domestic value chains, adding that they can be supplemented by environmental requirements and multicriteria auctions that encourage regional sourcing.

But IRENA warns that these should be used selectively, as “rigid requirements in markets that have less absorptive capacity can worsen the very delivery risks they are meant to solve.”

The report points towards large, stable markets with a visible demand pipeline, such as China, India and Türkiye, as markets best poised to benefit from localisation.

In countries where supply shocks are more likely or renewable markets are more volatile, IRENA’s report recommends auctions should use realistic lead times and flexible schedules to reduce losses caused by delays. It also recommends appropriate price indexation or hybrid payment models to protect projects from rising costs without placing excessive risk on consumers. Moderate ceiling-price adjustments or volume-adjustment mechanisms can also help avoid low participation while limiting the financial risk to governments, IRENA adds.

The report also emphasises that auction responses alone are “insufficient” and must be supported by broader policies across the wider economy covering industrial policy, trade, finance, skills and energy.

The report’s conclusion adds that regional diversification and co-operation is also crucial. It explains that regional value chains and partnerships, such as the Africa Continental Free Trade Area, can provide its members with scale, market access and supplier diversification that can strengthen resilience and competitiveness.

It also suggests that circular economy measures can mitigate supply shocks in energy transition technologies by lowering dependence on imported materials, advising that public support for collection and recycling capacity will become increasingly important as waste from renewable energy supply chains grows.

IRENA concludes that policy makers have the opportunity to utilise renewable energy auctions “not only as a procurement tool, but as part of a wider public strategy for supply chain resilience.”

“When embedded in a wider policy framework, auctions can help countries anticipate shocks, reduce external dependence and capture more of the socioeconomic value created by the energy transition,” the agency says.