Reverse Auction in Wind Energy

The reverse auction system in wind energy refers to a competitive bidding process in which project developers offer to sell electricity at the lowest possible tariff to power utilities or government agencies. Unlike a traditional auction, where buyers bid higher prices to acquire goods, a reverse auction involves sellers competing to offer the lowest price, thereby driving tariffs down and promoting cost efficiency in renewable energy deployment.
This mechanism has become a cornerstone of India’s wind energy policy, transforming the industry from a feed-in tariff regime to a competitive market-based structure.

Background and Evolution

Before 2017, wind energy projects in India were primarily supported through Feed-in Tariffs (FiTs), under which state electricity regulatory commissions determined fixed purchase rates per unit of electricity. While this approach encouraged early growth, it also led to regional inconsistencies and relatively high tariffs.
In 2017, the Ministry of New and Renewable Energy (MNRE) introduced the reverse auction mechanism for the first time through the Solar Energy Corporation of India (SECI). The aim was to encourage competition, improve price discovery, and attract private investment while ensuring lower costs for consumers.
The first reverse auction for wind energy was conducted in February 2017 for 1,000 MW, which achieved a record-low tariff of ₹3.46 per kWh, significantly below the average FiT of around ₹4.50 per kWh prevailing at that time.

Mechanism of Reverse Auction

The reverse auction process in wind energy generally follows a structured, transparent, and technology-neutral approach.
1. Announcement and Bidding:

• The government or a nodal agency (such as SECI or NTPC) issues a tender specifying the total capacity (e.g., 1,000 MW) to be allocated.
• Eligible wind power developers submit initial bids indicating the tariff at which they are willing to sell power.

2. Pre-Qualification:

• Bidders are required to meet technical and financial criteria, such as project experience, net worth, and land availability.

3. E-Reverse Auction Stage:

• Shortlisted bidders participate in an online reverse auction.
• Developers compete by continuously lowering their tariff offers in real time within a defined time window.
• The lowest tariff bids win the auction, subject to capacity limits and performance conditions.

4. Power Purchase Agreement (PPA):

• Successful bidders sign long-term PPAs (usually for 25 years) with the procuring entity, ensuring revenue certainty.

This competitive process has led to substantial tariff reductions, improving affordability of renewable power for distribution companies (DISCOMs).

Objectives of the Reverse Auction System

• To discover market-based tariffs for wind power through competition.
• To reduce the financial burden on state utilities and consumers.
• To promote transparency and minimise regulatory intervention in tariff setting.
• To encourage efficiency and innovation among project developers.
• To ensure optimum utilisation of wind resources across diverse geographic regions.

Impact on Wind Energy Sector

The introduction of reverse auctions revolutionised India’s wind power sector, but it also created new challenges.
Positive Outcomes:

1. Tariff Reduction:
   • Wind tariffs declined significantly from around ₹5 per kWh (under FiT) to as low as ₹2.43 per kWh in later auctions (2018–2019).
   • This made wind energy competitive with conventional thermal power.
2. Increased Transparency:
   • The e-bidding and online auction format ensured open competition and minimised corruption or discretionary approvals.
3. Market Expansion:
   • The mechanism attracted new domestic and international developers, increasing private sector participation.
4. Efficient Resource Allocation:
   • Projects were located in areas with the highest wind potential, improving energy output and reducing cost per unit.

Challenges and Criticisms:

1. Aggressive Bidding and Financial Viability:
   • Developers often bid extremely low tariffs to secure contracts, sometimes below sustainable cost levels, leading to financial stress and delays in project execution.
2. Transmission and Land Constraints:
   • Lack of adequate grid connectivity and land acquisition issues in high-wind zones delayed project commissioning.
3. Reduced Interest from Developers:
   • With margins shrinking, some developers hesitated to participate in subsequent auctions, resulting in undersubscribed tenders.
4. Discom Payment Delays:
   • Power purchase agreements were affected by delays in payments from state distribution companies, impacting project cash flows.

Comparative Analysis with Feed-in Tariff System

The shift from FiT to reverse auction marked India’s transition from a policy-driven to a market-driven renewable energy model.

Major Reverse Auction Rounds in India

1. First SECI Auction (2017):
   • Capacity: 1,000 MW
   • Lowest Tariff: ₹3.46 per kWh
   • Developers: Mytrah, Green Infra, Inox Wind, and others.
2. Second SECI Auction (2017):
   • Capacity: 1,000 MW
   • Lowest Tariff: ₹2.64 per kWh
   • Marked the entry of global players and large-scale investment interest.
3. Subsequent Auctions (2018–2021):
   • Tariffs dropped to as low as ₹2.43 per kWh before stabilising around ₹2.8–₹3.0 per kWh.
   • Projects were expanded to new wind-rich states including Gujarat, Tamil Nadu, Karnataka, and Rajasthan.

Economic and Environmental Significance

• Cost-Effective Renewable Growth: Reverse auctions have enabled India to install wind energy at globally competitive prices, supporting its National Wind-Solar Hybrid Policy and renewable capacity targets.
• Energy Security: The mechanism has reduced dependence on imported fossil fuels and enhanced energy diversification.
• Climate Commitment: Lower-cost wind projects contribute to India’s Nationally Determined Contributions (NDCs) under the Paris Agreement.
• Technological Innovation: Competitive pricing encouraged adoption of advanced turbine technology, improved capacity factors, and digital monitoring systems.

Future Prospects

The reverse auction system continues to evolve with reforms aimed at improving efficiency and investor confidence. Current trends include:

• Hybrid Auctions: Combining wind and solar power in integrated projects to optimise land and transmission usage.
• Ceiling Tariffs: Setting upper limits on bids to prevent unviable offers.
• Inter-State Transmission System (ISTS) Connectivity: Ensuring seamless power evacuation from high-wind zones to demand centres.
• Bankable PPAs: Strengthening payment security mechanisms to attract global investors.
• Repowering Initiatives: Encouraging the replacement of old turbines with modern, high-efficiency units under the auction framework.