Auction flashbacks the pity scene of broke man or family desperate to sell off their belongings to pay off debt. The savior comes and saves the family fortune in the happy end!
Or the art gallery auction of the rare and very valuable art, artifacts and antiques where the proponent always wins at the last moment by big margin!
Or the road contract or construction auction won by the iconic hero at lowest price to take revenge!
What’s your version of auction?
My version is not filmy but it is all about proposition of real value discovery. My proponent savior can bring you out of the clutches of bad economics and dark-grim situations onset by climate change. I am talking about renewable energy, especially solar energy, auctions and choice of hero is with every one of you!
Over the past several years, auctions have spread quickly and the main motivation to achieve low price of energy, specifically solar energy, is driving their fast adoption worldwide. It also shows that the solar technology and its ecosystem are mature and auction is now the most preferred choice over feed-in-tariff and RPO.
Strength of auction process
Along with price reduction the other strengths of auctions can be attributed to some of their key characteristics
- Design Flexibility- auction gives buyer the freedom to customize the complete purchasing, procurement and implementation method to meet development and economic objectives. Buyer can make a choice of volume and how it can be shared by different technologies and project size, can set minimum qualification requirements by bidder, set the selection process and define rules and schedule of installation, operation and maintenance.
- Certainty of Prices and Quantity- buyer can set the price ranges specific to quantities and expect to meet the target more precisely.
- Quick and conflict free decision - Once contract is discussed with stakeholders (management, operation, accounts, etc) and set for the auction, the process automatically selects the vendor rather than several decision makers.
- Transparency and Commitment- clear and open contract qualification and terms make it transparent, offer the comfort and increases the commitment level of all the bidders.
- Real Price discovery – open information and its rapid dissemination between bidders and buyer promotes competition among bidders and lead to better than expected price discovery.
Status of Solar Auctions
Capital cost of solar is reduced by 80% in last 5 years and reached well below Rs. 3.5 crore (US$ 0.55 million) per MW. In the same period, 20GW of solar auctions are organized and awarded by state level and national entities in India. Another 40GW of solar auctions are set to be conducted in next 3 years. The phenomenal success is self-professed by reaching lowest price of Rs. 2.44 (US$ 3.7 cents) per unit for 500MW Bhadla phase-IV solar park auction during last week and US$ 2.99 cents per unit in 800MW DEWA, Dubai auction in 2016. Solar rooftop auctions conducted by SECI have achieved the lowest price of Rs. 3 per unit after 30% subsidy.
Rooftop solar capacity (1300MW) is miniscule as compared to utility scale but it is slowly and steadily gaining popularity. Other than government entities like SECI, the auction mechanism is not adopted by Industrial, commercial and residential customers & they are still struggling to utilize this best purchasing method.
Comparative Purchase
Industrial and commercial buyers have adopted SAP Material Management Module/ Oracle Advanced Procurement /Other ERP for purchasing & procurement.
They begin the solar purchasing process by market search and sending inquiries to several vendors. Then they call some of the vendors to get educated on solar technology and commercials. This process takes 6 months to 2 years, before they decide to go solar or not.
They request quotations for items or services from various vendors using the purchase quotation or work order document. Once buyer have negotiated and compared the vendors' quotes and found the best offer, buyer proceeds to ordering the goods or services. To order the items or services, buyer creates a purchase or work order document. Buyer creates a new document based on one or more of the existing ones using the similar specifications, terms and conditions.
Weakness of Comparative Purchase
- Information asymmetry between vendors usually creeps in and the vendor selection process becomes non-transparent.
- Shortlisting is done subjectively at the behest of several decision makers having conflicting views. It not only delays the selection but also leads to selection of either inexperienced vendor or substandard item or service.
- The price discovery is governed by the internal comparative statement where the prices and terms are not shared with all vendors. It removes competition and commitment of vendors. Thereby, the best outcome price may not be achieved most of the times.
If Auctions are Bahubali then the regular comparative purchase is Katappa. Where the promise of legacy and loyalty of Katappa comfort you by killing the pricey and resourceful Bahubali without giving a second thought to other more win-win outcomes. Don’t you think it becomes an obvious choice to back Bahubali and sympathize with Katappa!
Utility Vs Rooftop Solar
Rooftop solar is the way to go solar for Industrial and commercial buyers. The LCOE of rooftop solar for 25 years is around Rs. 5.5 (US$ 8.5 cents) per unit as compared to average grid electricity cost of Rs. 7 (US$ 11 cents) per unit & add an escalation of at least 3% per year.
Rooftop segment is still averse to auctions even when it is well proven that auction help in substantial price reductions. The buyers are still using traditional methodologies of comparative purchase and negotiation in expectation of getting the same price below Rs. 3 per unit. Standard auction design and implementation in rooftop solar segment can make wonders similar to utility scale.
In summary, if utility solar auction is Bahubali 1 then rooftop solar auction is Bahubali 2 (chronologically)!!!