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Auctions Push Clean Power Suppliers Toward Ever-Lower Costs

Energy supply auctions are replacing centrally planned utility expansions from China to Mexico and Canada—driving down the cost of electricity from independent renewable providers, and shaking up both energy markets and once staid utilities.

Mexico’s state electricity grid recently received a record-low price offer of 1.7¢ per kilowatt-hour for wind power. The cost of solar electricity generated in Inner Mongolia plummeted 44% during in 2016, while wind power prices in India hit a record low last month.

“In all three cases,” Bloomberg notes, “the government had adopted an auction system to determine how much it would pay developers. The lowest bids win.”

The turn to competitive bidding, Bloomberg says, is “accelerating a renewables boom sparked by already tumbling prices for solar panels and wind turbines.”

But it means that “only those that have the most efficient technology, most precise and best practice of manufacturing, most solid financing, and strongest control over the supply chain can survive,” said Qian Jing, a vice president at JinkoSolar Holding Co., the world’s biggest solar-panel maker.

The trend may “squeeze margins for developers,” Qian observed, but it will also force them to find new efficiencies.

Meanwhile CBC business columnist Don Pittis notes approvingly that Alberta is turning to the same model. [In fact, British Columbia pioneered the approach in Canada a decade ago, for supplies of hydroelectricity from small independent power producers. – Ed.]

The Alberta Electric System Operator (AESO), which operates the province’s power grid, opened an auction for bids to provide an eventual 5,000 megawatts of renewable electricity generation by 2030, Pittis observes. The winners of the first auction round are expected to be announced within weeks.

If prices come in as anticipated, as low as 5¢/kWh, they will be “in the same range as the gold standard combined-cycle natural gas power plant,” Pittis writes, “and just the beginning of a process that will use market forces to stimulate new efficiencies in Canada’s electricity market as technology improves.”

Pittis notes the sharp contrast between auction-driven renewable price efficiency and the legacy of provincial utilities’ central planning, dominated by energy megaprojects that increasingly look like expensive white elephants.

Including start-up and decommissioning costs, Ontario Hydro’s commitment to nuclear power “would be impossible to justify on a market-competitive basis,” the CBC analyst asserts.  Ongoing cost overruns and second-guessing of the viability of Newfoundland and Labrador’s Muskrat Falls and B.C.’s Site C hydroelectric megaprojects further illustrate the need for a change in how Canadians get their electricity.

The twin effects of auction incentives and ongoing price declines will challenge Canadian provincial utilities’ generally old-style model of capacity planning, Pittis writes. “And with Mexico’s under-two-cent power, even without carbon pricing, the argument from the fossil fuel industry that green power cannot stand alone no longer holds water.”