Reverse Auctions for Renewable Energy
Smart Policy in Everyone’s Best Interest
Reverse auctions: A policy mechanism worth exploring
The U.S. is struggling to achieve some of its national energy goals: enhance energy
security; promote domestic economic activity and foreign competitiveness; and improve
environmental sustainability. Smart energy policy can help, however, a variety of forces have
inhibited Congress’ ability to move a comprehensive energy bill. Nor has Congress been able to
move legislation that is specific to one sector, whether that be coal, gas, nuclear, wind or solar.
While each sector lobbies for its own interests, the “renewables” sector, wind and solar, hasn’t
done a sufficient job of advancing the policy discussion to ensure that its interests are
protected. The renewables sector needs to make it easier for Congress to provide the political
certainty that is necessary to drive continued investment and development in the sector. The
renewables sector should look beyond tax-based support policy mechanisms to more market
driven support policies that work in the best interest of all stakeholders: equipment
manufacturers and vendors, project developers, owners, and power consumers. This group of
stakeholders would like to see policy drive product volume and installations, and help
facilitate more competitively priced electricity. One such policy mechanism that is proven in
accomplishing both of these goals is a “Reverse Auction.”
What is a reverse auction?
In a reverse auction, prices go down instead of up. In a typical auction, multiple buyers
submit bids to buy something from a single seller, often causing the ultimate sale price to rise
above the initial offer price. In a reverse auction, multiple sellers come to sell something to a
single buyer, often causing the ultimate sale price to fall below the initial bid for business. As
with typical auctions, reverse auctions create micro-markets and can be very useful tools for
facilitating price discovery. When applied to power markets, reverse auctions serve as a
contracting mechanism whereby project developers bid for power purchase agreements (PPAs)
from a utility, end customer, or other contracting authority.
As the renewables sector strives to promote a federal energy policy that would
encourage further development of renewable power and attract investment, industry
participants should consider promoting reverse auctions as an effective mechanism to drive
product volume and future installations, and facilitate more competitively priced power.
Reverse auctions are a market driven procurement tool that would complement existing state
renewable portfolio standards and REC markets and could open the door for competitive
bidding for support mechanisms such as production-based cash grants and feed-in tariffs as
solar and wind approach grid parity in more regions of the country.
How does it work?
Figure 1 shows a simplified flow
diagram of power, renewable energy
credits (RECs) and money between those
with exposure to a reverse auction that
is conducted by a central contracting
authority. Project developers would
compete for power purchase contracts
with the contracting authority by
submitting bids via a technology-based
reverse auction platform. The bidder(s)
with the lowest price or combination of
lowest prices that also fulfill the power
contract load profile requirement would win the auction and the power, and RECs, would be
sold into a regional power market.
How are reverse auctions any different than a typical RFP process?
When a utility issues a request for proposal (RFP) solicitation for either power or
renewable energy credits, it is effectively creating a competitive marketplace where the bidder
with the lowest price wins the procurement contract. However, despite the fact that a blind
RFP attracts competing bids, the bidding process is often not transparent and therefore doesn’t
foster truly competitive selling behavior. Blind RFP market structures force each bidder to
guess who else might be in the market and at what price those bidders could submit to the
procuring entity. Therefore, blind RFP processes do not allow for optimal price discovery.
Additionally, bidding in typical RFP processes are often conducted by written proposals or email
submission and not supported by dedicated technology exchange platforms and therefore do
not allow for transactions to happen very quickly.
A reverse auction is effectively a technology enabled RFP that optimizes the efficiency of
the procurement process by creating a dynamic market environment where vendors can make
business decisions based on real-time pricing information. A typical blind RFP may offer one or
two bidding rounds over the course of the multi day or week solicitation period. A technology
enabled reverse auction allows bidders to submit as many bids as necessary, over a short
period of minutes rather than days, to compete for the procurement contract against other
bidders prices that are visible to all participants. A technology enabled, exchange-like auction
system that allows for unlimited bids per auction fosters competitive selling behavior, true price
discovery and rewards the most efficient supplier.
Reverse auction proposal in the U.S. House of Representatives
Select members of Congress have proposed the use of reverse auctions at the Federal level
as a way for renewable energy project developers to compete for support monies. In the 112th
Congress, Representative Devin Nunes proposed Bill H.R. 909 that received support from 73 cosponsors and called for the establishment of a Federal Reverse Auction Authority (RAA), which
would be a private sector non-profit entity overseen by the US Department of Energy (DOE), to
initiate and conduct reverse auctions to support the development of domestic, renewable
energy growth. H.R. 909 proposed to empower the RAA with the authority to distribute
production-based support payments to renewable generators from a single-purpose trust fund,
awarded to the least cost bidder found through the reverse auctions, as a way to further assist
technologies along their respective
cost curves as they approach grid
parity across the country. The Bill
proposed that the Trust Fund be
seeded by off-shore oil & gas drilling
lease sales, bonus payments and
production royalties (See Figure 2.)
The combined Reverse Auction
Authority and Oil & Gas Trust Fund
idea in H.R. 909 is a unique proposal that could help the country achieve its national energy
goals, while appealing to stakeholders in the renewables sector as well as the traditional energy
sectors. Renewable energy industry participants could perhaps use this proposal as a starting
point for negotiation in order to navigate through the political gridlock in Washington and work
towards a bipartisan national energy policy.
How can reverse auctions drive volume and future installations of renewable energy?
Reverse auctions are proven to benefit the consumer of power but can also serve as a
mechanism to drive volume and future installations of renewable power in the U.S. The
Reverse Auction Authority idea proposed in H.R. 909, for example, which would become a
central body for conducting auctions, could also become the central counterparty with which
renewable energy project developers sign power purchase agreements (PPAs), thereby
streamlining what is currently a long and costly process for developers. Streamlining the PPA
process would likely have the immediate and positive effect of encouraging faster rates of
renewable energy development. A Reverse Auction Authority would also likely encourage
sweeping cost reductions by virtue of the fact that it would distribute support monies to
producers with the most competitive offer price.
Outside of policy, utilities and large power consumers should consider using technologybased reverse auction tools to streamline procurement of power. Not only would this have the
effect of reducing delivered power to the procurement body, it would also open up new sales
channels for renewable power sales. As will be discussed in the subsequent case study, the U.S.
General Service Administration is an example of reverse auctions driving renewable energy
sales by virtue of the fact that the buyer specified its desire to purchase a certain percentage of
its power from renewable energy sources, attracting renewable energy sellers to an otherwise
inaccessible market.
Critiques of the reverse auction proposal in H.R. 909
While the reverse auction proposal is unique, it has some inherent flaws that could prevent
the policy from successfully promoting renewable development, if passed into law. For
example, the Bill:
-
-
Limits the reverse auction to financial support from the Trust Fund, which would
limit the value of the auction;
Requires renewable power generators would need to identify an ultimate
purchaser of the electricity, which is an existing challenge for developers;
Requires bidders to have secured a power purchase agreement (PPA) in advance
of the auction, which typically takes place after a developer knows the extent of
the financial support and would likely prevent many bidders from competing in
the auction;
Provides that monies from the Trust Fund would be subject to appropriations
Acts, which may have the same chilling effect on development as the cycles of
expirations and extensions of tax-based support.
Notwithstanding the shortcomings of the legislation as it was originally written in H.R. 909,
there are potential solutions to these limitations that could allow this policy to successfully
promote increased volume of renewable energy sales in the U.S. For example, the language of
the Bill could be altered to:
-
Assure the Trust Fund has a steady source of support without the need for
Congressional appropriations;
Allow the Reverse Auction Authority to purchase the power under long-term PPA
Allow the Reverse Auction Authority to purchase RECs and resell them in their
respective markets
Require all Federal agencies to purchase all their REC needs through the Federal
Reverse Auctions
Require each State regulatory authority in States that have an RPS to conduct a
proceeding to consider permitting utilities in their state to purchase “Federal
RECs” to satisfy, in whole or in part, their utilities’ State REC obligations under
their RPS
Conclusion
The renewables sector should look beyond its support of tax-based support policy
mechanisms to more market driven support policies, such as reverse auctions, that work in the
best interest of all stakeholders by driving volume and installations and further reducing costs
to the consumer. The policy proposal to create a Reverse Auction Authority that has the power
to distribute support monies from an “American Energy Trust Fund”, for example, would
provide the political certainty that the renewables sector needs and further assist renewable
energy technologies along their respective cost curves towards grid parity, enabling sustainable
long-term growth of this industry in the U.S.
Reverse Auction Case Study:
U.S. General Service Administration’s use of reverse auctions is saving the tax-payer money
and driving renewable power demand
The U.S. General Service Administration (GSA), an independent agency of the US
Government that was established in 1949 to help manage and support the basic functioning of
federal agencies. GSA has used reverse auctions to procure power for over a decade, saving the
U.S. tax-payer money.
Power procurement and building energy management for GSA’s Region 7, which is
responsible for the States of Texas, New Mexico, Oklahoma, Arkansas, and Louisiana, is handled
by an “Energy Team”. Program Manager, Kevin Myles, with the Public Building Service, is a
member of that Team headquartered in Fort Worth, TX. As government employees who are
responsible for the energy management of approximately 1,350 Government owned and leased
buildings, the “Team” works to reduce energy consumption and to contain utility costs.
The Team has used electronic reverse auctions to procure power for roughly 115
government buildings in deregulated parts of the State of Texas, (Municipal Utilities and
Cooperatives are not deregulated and thus do not participate). Members of the Team are
tasked with the challenge of reducing the environmental footprint of the buildings they
oversee, reducing energy costs, enhancing national energy security by reducing their
dependence on fossil fuels, and being good stewards of U.S. tax-payers money.
When the electricity market in Texas deregulated in 2002, Kevin Myles and his Team
conducted a study and review of the procurement literature to determine the most cost
effective way to procure power for the buildings in GSA Region 7. During their analysis, the
Team found examples of procurement practices in the auto industry and military where reverse
auctions were being used to good advantage. Reverse auctions, as the Team found, are most
effective in markets with a uniform, interchangeable, commodity-like product, where one unit
can be easily substituted for another unit. For example, auctions where gallons of paint or
barrels of oil, or kWh’s of electricity, where one unit does not differ from another in quality
work best under this type of procurement. Reverse auctions also benefit when there are
multiple suppliers of these products who can compete on price and if there are low barriers to
market entry. In many cases these reverse auctions have saved the procuring entities
anywhere between 10-25% of what the cost would have been, if not for the competitive
bidding process of the reverse auction.
At the conclusion of the their review, the Team at Region 7 concluded that it could
leverage GSA’s bulk buying power to create its own market for utilities services and reduce the
ultimate purchase price using a reverse auction. Region 7 subsequently contracted with a
company now called “World Energy Solutions” to conduct the first auction on its behalf.
The initial auction was a success, yielding the anticipated savings that the Team at
Region 7 expected. However, as GSA is often one of the more entrepreneurial agencies of the
government, Kevin and his Team set out to develop their own reverse auction software and
platform to achieve additional cost savings. The Team appealed to the “venture capital fund” in
the CIO’s office of GSA to request funding to build their auction platform. Following an
application for a grant, the Team was ultimately awarded ~$110,000 to build a software
platform and server to its own conduct reverse auctions. This amount included the software
development as well as the purchasing of a server to run it on. The software met all CIO office
and government requirements and was specifically adapted for Government procurements.
After a few months of development, the platform was successfully built and tested,
allowing GSA Region 7 to conduct its own reverse auctions. The Region typically enters the
utility markets and procures power for approximately 115 of its deregulated Texas buildings at
periodic intervals. Normally, these “buys” are from 3 to 5 years depending on the length of the
contract awarded in the previous round. (It only requires at most three people to run any
particular auction.) The total load (electricity demand) of these buildings is approximately 130
million kWh/yr. The current five-year contract will expire in 2013 and the Team at Region 7
intends to hold the next reverse auction within the next year or so, for the follow on contract.
How do GSA’s reverse auctions work?
GSA Region 7’s reverse auction process is fairly straight forward. In a reverse auction,
there are multiple sellers of a uniform, interchangeable, commodity-like product, and one
buyer. In this light, the on-line reverse auction process operates in a similar way that a typical
auction takes place on eBay, where there is a single good for sale and multiple bidders, only it
works in reverse with the offered price going down instead of up (hence the name “reverse
auction”). The party that offers the most favorable price and terms “wins” the Government’s
business.
To kick off the process, GSA Region 7 presents the market with notice of its
procurement requirements including the building load profiles and utility use histories for their
buildings. The Government then invites utilities, IPPs, and independent power marketers to
participate in the reverse auction. The Government reviews and “qualifies” those responding
who are the most qualified to provide the Government’s requirements. The reverse auction
announcement is published on the electronic portal for doing business with the Government
(FedBizOpps website1). This is done to encourage competition. Region 7 also sends a
notification of the upcoming auction in the mail to all of the registered retail electricity
providers that are registered with the Public Utility Commission of Texas. Myles notes that the
Team typically receives a lot of interest from these two solicitations.
GSA will then conduct short-listing round in order to select the companies that are
allowed to move forward and participate in the reverse auction. Myles notes that that the
contracting office conducts a full credit and financial responsibility analysis of the potential
bidders in order to generate the shortlist. Most of the potential participants are generally
recognizable names, but sometimes there will be newer market participants or smaller firms
that require a greater amount of scrutiny. The Team at Region 7 will ask certain questions of
these less established bidders in order to become comfortable with their ability to deliver,
should they ultimately submit the winning bid. Questions may include items such as: Have you
1
http://www.fbo.gov
operated in this business before? How long have you operated in this business? Can you
provide client references? During the short-listing process, Region 7 generally excludes those
who appear to lack qualifications such as technical ability, experience, or financial stability. It is
very important to the Government that the flow of power to its buildings continues
uninterrupted and reliably. This type of large power procurement typically attracts firms such
as major utility providers with strong balance sheets and deep experience. The companies that
pass these tests are short-listed to participate in the reverse auction.
The electricity load for GSA Region 7’s deregulated Texas buildings is broken out into 4
lines and wires service territories, which are effectively small markets (or clusters of buildings
served) on which the power marketers bid. Marketers are asked to price power as both 100%
conventional generated power and alternatively as 50%-100% renewable. The Team asks the
marketers to submit these two bids so that they can get a true feel for the price of both power
products. In an uncompetitive environment, a utility might say that the renewable energy must
to be sold at a large premium to traditional power because it’s an “intermittent” resource that
has to be backed up with spinning reserves. In Region 7’s experience, however, this is only
partially true, and not universally the way things work. The 100% conventional vs. 50%
conventional and 50% renewable bidding system provides Region 7 with a “yardstick” to judge
how big that premium should actually be, if any. In their most recent auction, Region 7 found
the price of wind power to be too high in their North Texas service area (4.4% premium to
100% conventional generation) but more reasonably priced in their other 3 lines & wires service
areas (2-3% premium to conventional generation). Kevin anticipates that the bids in their next
auction will be lower than in previous years as a result of current low natural gas prices. He
also expects wind generation to be competitive at 5 – 6 cents/kWh.
Myles indicates that the behavior of the participating bidders during the auction is
actually very interesting to observe in real time. Initially, he says, bidders will wait a while until
the first bid hits and then the volume increases very quickly as the bidding brings the price
down. Prior to and during the GSA auction, it is stated in BOLD UNDERLINED CAPS that the
sellers should pay close attention to the pricing levels of their bids because the GSA will hold
them responsible for whatever price they offer, under the firm bid rule. This helps somewhat
to prevent the “Winners Curse” but as a failsafe, GSA also requires bidders place bonds or
“corporate guarantees” and to provide information on their hedging strategy in order to
prevent a possible default on power delivery at the winning price. Neither the Government nor
the Marketer is well served if the price turns out to be one at which the marketer is unable to
perform.
Myles indicates that the timing of going into these markets is pivotal. The Team at
Region 7 typically conducts an auction during the shoulder months of the year when power
prices are lowest (spring or fall rather than summer or winter).
Just how much savings?
The cost “premium” of buying 50% wind power for three of four lines and wire areas
in the most recent auction (2008) equals an estimated $172,192 per year. However, this must
be viewed in the context of a nearly $70 million dollar five- year power purchase contract and
the ability of the reverse auction to drive down the price of both conventional and renewable
energy.
The prior reverse auction contract (2005) only had 5% renewable power and
averaged 9.23 cents/kWh. The 2008 contract averaged 10.6 cents/kWh. (This number includes
transportation charges, so the Agency is paying a net average of ~8.5 – 10 cents/kWh for the
actual power.) This is only a 15% increase over the power price locked in three years earlier –
that was awarded in a market where power prices were rapidly increasing. By comparison, at
the time the 2008 contract was awarded, the least expensive residential electricity price was
14.6 cents/kWh in Dallas, and 16.1 cents/kWh in Houston, 40% – 50% higher.
The ultimate buying decision, Myles indicates, is a balance between the purely financial
question, ‘what’s the least expensive option?’, and the energy security / environmental
question, ‘what option would yield the most renewable power?’ The 2008 5-year contract
valued at ~$69 million was considered to be both fair and reasonable and was considered to be
in the best interest of the Government. It represents the optimal mix of the twin objectives of
savings taxpayer money and advancing clean energy goals.
Myles believes that the GSA could do even better if not for a statute in the General
Service Administration Act of 1949 that sets a 10 year maximum term for utility contracts (other
government agencies, such as the Military, have different authorities and longer contracting
term limits). Myles indicates that if this contract term limit were increased to 20 or 30 years, he
feels his Team could further reduce the contracted price for power that the Government must
pay using tax-payer dollars. Such an extension could also attract a greater number of bids from
developers who want to build future clean energy capacity and finance new build against 20 –
30 year PPAs with the Government.
Why building energy efficiency management is so important
Further to the inherent challenges of balancing the economic, energy security and
environmental fiduciary duties of the job, Myles and his Team are among many managers
responsible for seeing that the government meets Energy Efficiency Guiding Principles by 2015
and achieves zero-net-energy use in buildings by 2030, as mandated by Federal Statutes and
Executive Orders 13423 and 135142. Thankfully, as Myles and his Team have found, the
effectiveness of procuring power using reverse auctions is dramatically enhanced by the
Agency’s use of building energy efficiency management practices.
In addition to power procurement, the Team at Region 7 also reduces the load of their
buildings by improving overall energy efficiency through building energy management systems
and advanced metering technologies in buildings with large energy consumption. Region 7 has
employed advanced metering with an average of some ~30 contact points throughout each
building in its inventory (including ambient air temperatures, CO2 sensors, chilled water in and
2
Federal Sustainable Building and Campus Requirements http://www1.eere.energy.gov/femp/program/sustainable_requirements.html
out sensors, boiler sensors, lighting sensors, etc.) A former nuclear engineer monitors these
building statistics in real time and sends actionable information to each building manager, and
building operator, when equipment attention, adjustment, action or maintenance is required.
How is this relevant to a discussion about reverse auctions? By virtue of the fact that
Region 7 has such good command of its power load, the Team can give reverse auction bidders
very accurate load profiles on each of its buildings. In turn, the bidders don’t have to build a
“fudge factor” into their ultimate bid in order to account for unexpected load and
contingencies. This saves both the buyer and the seller money on the transaction. GSA will
also give a letter of authorization to each bidder so that each can request a load profile history
from the serving utility for confirmation, and so it can make its own independent assessment of
the data.
The Building Owners and Managers Association (BOMA) is an industry trade association
whose members have an extensive portfolios of commercial properties around the country.
Myles quoted the average amount of energy that is required to operate the buildings under
management by members of BOMA as being equal to approximately 78k Btu/gross square foot.
He states GSA Region 7’s average energy consumption to be approximately 48k Btu/gross
square foot. Relative to industry standards, GSA Region 7 has become quite the model of
building operation for energy efficiency to be emulated.
Scaling this model across other agencies
The cost savings that GSA Region 7 has been able to capture by developing its own
proprietary reverse auction platform could possibly be scaled across other branches of
government. In fact, The Navy, and some other branches, already use reverse auctions
mechanisms to purchase uniform, interchangeable, commodity-like products. Myles indicates
that the Energy Team at Region 7 will sometimes approach other agencies to invite their
participation in GSA energy buys. Myles indicates that they often receive initial interest, but in
many instances, other agencies are either already under existing power contracts, or their
building loads are too different for it to be efficient or attractive to be included. The underlying
impediment to scaling up the reverse auction power purchasing platform that the Energy Team
at GSA Region 7 have developed is what Myles sees as a general need for more people with a
“power procurement” skill set at many government agencies.
Reverse auctions drive renewable energy sales
This case study shows how reverse auctions can drive renewable energy sales. The GSA,
which is a buyer of bulk power, was empowered with the ability to specify its desire to
purchase a certain percentage of its power from renewable energy sources because of its
reverse auction tool. This had the dual effect of attracting renewable energy sellers to an
otherwise inaccessible market and allowed for competitive price discovery that in turn made
the renewable energy affordable.i
i
The views expressed by Kevin Myles are his own and not official U.S. Government policy