The design of technical requirements in public solar auctions: Evidence from India [original]

Renewable and Sustainable Energy Reviews 154 (2022) 111713

Available online 18 November 2021

The design of technical requirements in public solar auctions: Evidence

from India

Florian Anselm Münch

, Adela Marian

Technical University Berlin, Chair of Innovation Economics, Straße des 17. Juni 135, Berlin, 10623, Germany

Institute for Advanced Sustainability Studies, Berliner Str. 130, Potsdam, 14467, Germany

ARTICLE INFO

Keywords:

Solar energy

Public auctions

Quality standards

Local content requirements

Industrial development

Technological upgrading

Derisking renewable energy investment

India

National Solar Mission

ABSTRACT

Solar technology diffuses across the globe as countries transition from fossil to renewable energy. Little solar-

specific experience and capacity in newly adopting countries can result in technical failures and lower solar

plant performance. This contributes to making the investment in solar plants in newcomer countries risky and

may undermine political targets of solar energy deployment. One solution suggested by international organi-

zations is for policymakers in adopting countries to include international quality standards as technical re-

quirements in public auctions. Here, we develop a conceptual framework on how international quality standards

could help build a solar sector. As a case study, we analyze the explanatory factors of technical requirements in

100 public auctions of utility-scale solar photovoltaic plants carried out in India between 2013 and 2019. Our

findings suggest that more international quality standards are required in auctions in which the government

rather than a private actor ultimately carries the commercial risk. On the other hand, local content requirements

and attracting foreign investors do not correlate with technical requirements. We argue that using minimal

quality standards is unlikely to promote local technological catch-up or attract long-term foreign investments but

transfers the techno-commercial risk from the government to the private sector.

1. Introduction

Solar photovoltaic (PV) technology is currently diffusing across the

globe [1], with 106 countries having held renewable energy auctions by

the end of 2019 to foster the transition from fossil to renewable energy

[2]. However, evidence suggests that solar PV projects may underper-

form in many low- and middle-income countries, including India. For

example, it was reported that 30% of nearly 100 analyzed projects in

different countries indicate severe defects [3]. Furthermore, a study of

the National Metrology Institute of Germany (PTB) and PI Berlin, a

global quality assurance provider, found in all six examined

grid-connected solar PV plants in India “sporadic or systemic failures

with impact on performance” [4]. Thus, if solar PV projects fail to

perform as expected, investors may not recoup their money, under-

mining future investments and, in turn, political goals for renewable

energy deployment [5–7].

One solution recommended by international organizations such as

the International Renewable Energy Agency (IRENA) and PTB is that

policymakers in adopting countries include international quality stan-

dards

as technical requirements in the design of public auctions [4,7,8].

For instance, it was suggested “that strict technical requirements [ …]

should be part of tender requirements [ …]. [ …] Lax tender re-

quirements should be avoided as they give comfort to module suppliers

and installation companies as no legal framework is forcing them to

provide evidence of long-term durable products and failure free instal-

lation works” [4, p.6]. Similarly, it was proposed that “the auctioneer

can also define other technological requirements, [ ….], such as speci-

fications on the equipment used. Imposing equipment specifications can

help ensure that the sector will be developed using state-of-the-art

technology and appropriate quality of components” [8, p.32]. Hence,

compliance on the part of solar PV plant developers with specific quality

* Corresponding author.

** Corresponding author.

E-mail addresses: [email protected] (F.A. Münch), [email protected] (A. Marian).

International quality standards are defined here as formal standards issued by the International Electrotechnical Commission (IEC) and the International

Standardisation Organization (ISO) pertaining to solar PV plant component performance and durability, their transport, installation and commissioning. For example,

IEC 61215 “solar PV modules peak and life performance ratio” defines the tests and procedures to assess the performance of solar PV modules. We also included

national standards (i.e. UL 1541, IEEE 2030.5, EN 1991 and EN 1997) that are broadly recognized internationally.

Contents lists available at ScienceDirect

Renewable and Sustainable Energy Reviews

journal homepage: www.elsevier.com/locate/rser

https://doi.org/10.1016/j.rser.2021.111713

Received 17 February 2021; Received in revised form 21 August 2021; Accepted 26 September 2021

Renewable and Sustainable Energy Reviews 154 (2022) 111713

standards is expected to reduce quality defects and technical failures. In

turn, investor confidence and trust will increase, as uncertainty about

generated electricity decreases [7].

However, the existing literature on renewable energy auctions offers

few insights related to the optimal integration of technical requirements

into auction design. The effectiveness of renewable energy auctions is

widely found to depend on their design, which varies across countries

[8–17]. Yet, very few authors [17,18] have examined how specific

auction design elements condition their effectiveness. Publications have

rather focused on comparing auctions with feed-in tariffs [6,11,19,20].

As a result, there is a knowledge gap on designing renewable energy

auctions optimally, and on how different design elements (e.g. auction

mechanism, qualification criteria and bid evaluation, legal/contractual

clauses, local content requirements etc.) shape auction outcomes.

To close this gap and help policymakers choose technical re-

quirements for solar PV auctions in a more strategic way, we develop a

conceptual framework on how technical requirements could help build

up a domestic solar sector. Based on the framework, we derive three

hypotheses on how policymakers can choose to use international quality

standards as technical requirements in the design of public auctions for

solar PV plants. The three hypotheses are empirically verified in a

regression analysis of 100 public auctions for industrial, utility-scale

solar PV projects with a total capacity of 51 GW carried out in India

between 2013 and 2019. We also examine whether other potential risks

such as exclusion of bidders have materialized upon including interna-

tional quality standards.

Interestingly, “most African countries that held renewable energy

auctions (dominated by solar) in 2017–2018 did so for the first time” [2,

p.11]. Policymakers in these countries need to choose how to introduce

technical requirements and their design choice likely affects the devel-

opment of a national solar sector. India graduated from virtually zero

solar energy to the fifth largest photovoltaic market worldwide within

less than a decade. The Indian experience with designing technical re-

quirements to mitigate underperforming solar PV plants can help newly

adopting countries avoid similar mistakes.

In the following, section 2 illustrates the contextual background and

relevant literature. Section 3 outlines the conceptual framework and

develops our three hypotheses on the use of international quality stan-

dards by Indian policymakers. Section 4 presents and discusses the re-

sults of the empirical analysis. Finally, section 5 concludes with policy

implications and a research outlook.

2. Background

2.1. Public auctions as an instrument for the global energy transition

In the last two decades governments have increasingly used public

auctions rather than other policy tools to guide the expansion of solar

and wind energy [2,11–13,21]. Several recent publications emphasized

the ongoing need for further research on the recent experience with

public auctions for renewable energy [6,9,11,14].

Public auctions for solar PV plants work as follows. The responsible

government institution allocates the right to build a renewable energy

plant to the private company with the best bid. In a reverse auction, as

conducted in India, selection is based on price alone and the bidder who

offers the lowest price wins. The most general contractual agreement for

large-scale utility solar PV projects is Build-Own-Operate (BOO) asso-

ciated with a power-purchasing agreement (PPA). The PPA stipulates

that the government, mostly represented by a public utility, buys the

produced electricity for the following 25 years. Another contractual

format is Engineering-Procurement-Construction (EPC), which is less

frequent but crucial to our analysis. EPC contracts are associated with a

specified Operation and Maintenance (O&M) period, after which

ownership and liability for the solar PV plant are transferred to the

auctioneer.

The prevalent perception is that policymakers have increasingly

adopted public auctions to create a domestic market, reduce the pro-

curement price of electricity, avoid excessive subsidy levels and be able

to better steer and plan the expansion and integration of renewables into

national electricity grids (e.g. Refs. [2,6,14,15]). Several authors have

examined whether auctions represent a more effective policy tool than

the previously dominant options of bilateral negotiations with project

developers, quota and feed-in tariffs [6,11,19,20]. There seems to be a

consensus that auctions, if well designed, are a powerful, cost-effective

policy tool to create a domestic market and provide a necessary level

of investment certainty. Reverse public auctions have led to fierce price

competition and historically low electricity tariffs around the globe

[22]. For example, the highest winning bids in Indian solar auctions

were on average 36 percent lower than the feed-in tariff [23]. Although

this is less emphasized, the use of public auctions also led to a trans-

formation of ownership structures in the electricity sector, bringing

about a transition from public ownership to increased private ownership

[24]. While the EU and US markets are already dominated by private

power producers, with a 75% and 80% market share respectively, this

share is much lower in developing countries and emerging markets like

India and China - around 30 and 40%, respectively [24].

Yet, this consensus on the effectiveness of renewable energy auctions

has emerged in the context of a simultaneous decrease in international

prices for solar PV modules, the main cost factor of solar PV plants, and

the expansion of public auctions in several countries (proof-by-associ-

ation). Only few authors were cautious enough to underline that there is

no rigorous, counterfactual-based, causal identification of the effect of

public auctions on electricity price [15]. The concerns or potential

drawbacks of public auctions for the development of renewable energy

mentioned in the literature are (1) low(er) project realization rates, as a

consequence of adventurous or strategic underbidding, (2) a lack or

excess of competition, which may lead to market consolidation over

time in both cases, and, as a result, (3) insufficient incentives for dy-

namic learning-by-doing and innovation [10,15,17,25–28]. Lower

project realization rates have received most scholarly attention, with

most studies focusing on countries in the global north [10,15,16,26,

28–31], while the dynamic effect of auctions on competition/market

consolidation [11,32] and local learning-by-doing and innovation have

been understudied (excepting [18]). For instance, prices of initially

List of abbreviations

BOO Build-Own-Operate

EPC Engineering-Procurement-Construction

GW Gigawatt

IEC International Electrotechnical Commission

IRENA International Renewable Energy Agency

ISO International Organization for Standardization

LCR Local content requirement

MNRE Ministry of New and Renewable Energy

MW Megawatt

O&M Operation and maintenance

PPA Power-purchasing agreement

PV Photovoltaic

SECI Solar Energy Corporation of India

F.A. Münch and A. Marian

Renewable and Sustainable Energy Reviews 154 (2022) 111713

23–35% below competitive tariffs were found in the first reverse auc-

tions in India and were attributed to underbidding by inexperienced

players [5,26]. Several authors have noted that auctions are not a

panacea for successful renewable energy deployment given that

different countries had varying success rates [6,8,15,25,33]. One

conclusion may be that it is crucial to design auctions in line with a

country’s local institutional and industrial context. Auction design ele-

ments, such as technical requirements, may be one powerful mechanism

for policymakers to improve the effectiveness of auctions, i.e. reduce or

prevent low project realization rates and promote local

learning-by-doing (see section 3.2). Several authors noted that countries

choose slightly differing auction designs, which makes it difficult to

conduct cross-country comparisons, but also suggests that policymakers

adjust the auction design to the specific institutional and market context

[8–11,19]. Unfortunately, there are only few dedicated studies, mostly

based on one or at most a handful of countries for which several auctions

at best are observed over time [9,13–16,29]. Hence, there is only a

limited understanding of the incentives and rationale driving the auc-

tion design choices made by policymakers (exceptions are [17,25]).

This shortcoming has first been acknowledged in Refs. [8,10], which

both provide theoretical frameworks for auction design. Quantitative

evidence of the specific effect of auction design elements on the auction

outcome was first given in Refs. [17,18]. By comparing the project

realization rates for auctions in different countries and years in a

regression framework, it was found that pre-qualification measures and

penalties are positively correlated with realization rates [17]. Moreover,

local content requirements were shown to increase the bidding price in

Indian solar PV auctions [18]. Thus, it is a promising avenue for future

research to investigate how specific auction design elements condition

both the opportunities and the shortcomings associated with renewable

energy auctions. This paper contributes to closing this gap by investi-

gating the factors motivating the use of technical requirements in Indian

solar auctions.

2.2. Solar energy development in India: National Solar Mission

India’s domestic solar power generation before 2009 was negligible

and consisted only of a few mini-grid projects [19,34]. In 2009, the

Government launched the National Solar Mission. Its objective is to

install 100 GW solar PV capacity by 2022 and build up local, globally

competitive manufacturing. While about 20 export-oriented solar

module manufacturers existed already at the outset of the Solar Mission,

there was virtually no large-scale solar PV generation in India [34,35].

No cell manufacturing existed yet.

The Ministry of New and Renewable Energy (MNRE) through its

executive agency - the Solar Energy Corporation India (SECI) - has

managed to nurture and expand solar energy production. Yet, it remains

a challenge to establish globally competitive solar component

manufacturing at a large scale in India. Initially, MNRE relied on feed-in

tariffs and other policy tools (i.e. purchasing obligations for India’s

federal governments). Reverse public auctions and their eligibility

criteria have become the major policy tool to guide the development of

solar electricity production and component manufacturing [18,26,35,

36]. Among the eligibility criteria used by SECI are local content re-

quirements, restrictions on foreign bidders, and technical requirements.

While the initial approach to technical requirements can be charac-

terized as “laissez-faire”, there have been more recent efforts to foster

quality assurance and quality upgrading. In 2017, MNRE published the

national “Lab Policy for Testing, Standardisation and Certification for

Renewable Energy Sector” [37]. The aim is to upgrade the performance

quality of solar PV components and turn testing laboratories into centers

of global excellence. The policy also requires all components, in

particular PV modules, to be tested for reliability and performance in

India again. However, execution was postponed on several occasions

due to feedback from manufacturers and testing laboratories about

insufficient local testing capacity. In 2020, MNRE created a “Renewable

Energy Standardisation Cell”, which shall push for further quality

upgrading and public policies.

3. Conceptual framework and hypotheses

3.1. Technical requirements in public auctions of solar PV plants as a

policy tool for sustainable, industrial development

Green industrial development at the global frontier focuses on

inventing and patenting technologies that are new to the world. In

developing and emerging economies, green industrial policy deals

mostly with adapting, disseminating and finally catching up with the

global technology frontier [38,39]. International quality standards are

one mechanism to disseminate state-of-the-art technology and produc-

tion methods, and foster investment in product testing for trial-and-error

innovation in developing and emerging economies [40,41].

Fig. 1 illustrates how governments can require compliance with in-

ternational quality standards in public auctions for solar PV plants.

Firms bidding to develop solar PV plants will need to choose components

in compliance with specific technical requirements. Firms have an

incentive to invest in upgrading their production methods and product

quality accordingly, given that government procurement of electricity

creates business opportunities [40,42–45].

The benefits to local industrial development are twofold [41,46–49].

Firstly, international quality standards promote productivity (see sec-

tion 3.2.). The productivity increase can come from adoption of inter-

national best practices and from product tests in accredited laboratories

as defined in international quality standards. Product tests are an op-

portunity for domestic firms to trial-and-error test their products and

compare their quality against international benchmarks. For example,

less than a handful of Indian companies conducted in-house research

and development in 2012 [18,34]. Secondly, quality standards should

have a strong positive signaling effect (see section 3.3). Buyers (in-

vestors) have incomplete information about the quality of the sellers’

production processes, and thus are either unwilling to buy or only

willing to pay less [50]. Incomplete information is particularly prob-

lematic when a country enters solar PV energy production, given that

there is little local data about potential electricity yields and technical

component resilience (i.e. in tropical climate conditions) [51]. Scarce

information is also likely to be often paired with investors’ mistrust

against the general investment climate and institutional context of most

developing and emerging countries. Hence, adherence to international

quality standards is likely to have a strong, positive signaling effect to

investors or banks.

Finally, there are also some risks related to the use of (international)

quality standards in public auctions to promote green industrial devel-

opment. Firstly, quality standards exclude non-compliant competitors.

This may be a concern for governments in developing and emerging

countries, particularly in smaller countries that may only have a few

competitors, especially during the initial transition to solar PV [49,52].

Secondly, international quality standards may notably hurt local firms if

there are insufficient, costly, or slow testing services available, while

idiosyncratic national standards may scare away international compet-

itors [49,53]. Limited local testing capabilities are a common problem in

developing and emerging countries, given that testing equipment has

high capital costs and requires specialized personnel [7]. Idiosyncratic

national quality standards, by contrast, create additional costs for in-

ternational competitors, which may prevent them from entering a

market, particularly if the market is very small. Thirdly, quality stan-

dards may raise the bidding price, which in turn raises the cost of

electricity for the government. While this is in principle true, engi-

neering studies suggest that the benefits of stringent quality assurance,

at least at the project level, outweigh the additional costs of quality [4,

54]. Ultimately, a crucial concern anchored in the industrial policy

literature is that policymakers may not possess the capabilities to

determine which standards should be selected at what stage of industrial

F.A. Münch and A. Marian

Renewable and Sustainable Energy Reviews 154 (2022) 111713

development [55]. In conclusion, too stringent quality standards could

force nascent players to exit the market, while too lenient quality

standards may entail that there is no local industrial learning along with

reluctance from buyers to invest in solar PV projects.

In the following, we formulate three hypotheses related to the use of

international quality standards in public auctions for solar PV plants in

India.

3.2. International quality standards as technical requirements: a

performance benchmark to complement local content requirements?

The Indian government aspires to expand domestic solar PV elec-

tricity production and create globally competitive domestic

manufacturing. Therefore, local content requirements (LCR) were

introduced in India’s public auctions for solar PV plants. LCRs obligate

independent power producers and project developers to source solar PV

modules and/or cells in India [18,35].

LCRs often increase procurement costs, as they are typically intro-

duced when local prices are higher than world market prices [18]. The

rationale for LCR is that local producers are temporarily protected from

foreign competition, can gain hands-on experience with a certain tech-

nology (“learning-by-doing”), and catch up with international players

[49,56,57]. Firms learn and improve their efficiency/productivity when

beginning to manufacture, in this case solar PV modules and cells, but

learning rates decrease over time [56,58]. Once learning-by-doing en-

ables local producers to lower their costs to match world market prices,

LCRs are no longer necessary and can be withdrawn. A common criti-

cism towards LCR is that they often fail to provide sufficient incentives

for local beneficiaries to improve performance and reduce prices, e.g.

because of rent-seeking and government failure, and thus fail to trans-

form nascent industries into competitive ones [59–61].

We are interested, however, in the interplay between LCR and

quality standards. Innovation through rule-setting has proven effective,

for example in environmental regulation [62] and technological

upgrading due to foreign restrictions [40]. In a similar vein, technical

requirements can be combined with LCR to provide performance in-

centives. Governments can thus require bidders to source components

locally and comply with national or international quality standards.

Hence, performance standards could be used to drive domestic pro-

ducers to engage in learning-by-doing rather than import intermediation

[59]. For instance, Denmark’s aggressive promotion of standards and

quality certification helped the country become and remain a world

leader in wind turbines [49]. Similarly, it was argued that the incentives

and protection provided by industrial policies (“carrots”) need to be

complemented through a “stick” to guarantee that beneficiary firms also

engage in learning, quality upgrading and productivity increases [55].

Hypothesis 1. Policymakers use technical requirements such as in-

ternational quality standards to push local firms to catch up with the

global solar PV production frontier.

3.3. International quality standards as technical requirements: a signaling

tool to de-risk investors?

Globally, the majority of investments in renewable energy since

2016 have been taking place in developing and emerging economies [8,

14,63]. In India, the government orchestrates the expansion of solar PV

electricity. Yet, it is the large Indian industrial conglomerates, Indian

banks, and non-banking institutions such as international venture cap-

ital and hedge funds that develop and finance utility-scale PV plants [22,

64–66].

We apply insights from economic theory on quality uncertainty and

adapt it to the context of solar PV auctions [46,47,50,67–69]. As

mentioned in section 3.1, compliance with international quality stan-

dards has been shown to overcome the buyer’s insufficient information

or lack of trust, for example in international trade [47,67,69] and

foreign direct investment [48,68]. International quality standards create

trust, as they signal use of state-of-the-art production processes.

Signaling applies in principle to both domestic and international in-

vestors, but information asymmetry and lack of trust are especially

relevant for foreign investors [46,47,68,69]. In the following, we outline

Fig. 1. Flowchart of the conceptual framework presented in section 3.

F.A. Münch and A. Marian

Renewable and Sustainable Energy Reviews 154 (2022) 111713

how international quality standards introduced as technical re-

quirements in public auctions could help remedy the lack of information

and trust in solar PV performance.

Investments in solar PV projects follow the risk-return profile of the

respective project [53]. Technical risk is significant in developing

countries with low solar-specific industrial capacity, experience and no

historical performance data for credible yield estimates [30,51,70–72].

Even in the EU and the US, investors rate technology performance

standards as third-best among 12 market-pull policies [73]. A solar PV

plant is an attractive asset if it generates the expected energy yield and

revenue over a period of up to 25 years. Payback and break-even times

increase when components malfunction and underperform. PV modules

are the key component of solar PV plants and make up 50% of the costs

[7]. In fact, independent assessments of modules have shown they often

underperform relative to manufacturer indications at up to 3% already

before operation [7] and degrade over time at 0.4% per year in the US

and Europe and at about 0.6% up to 5% in PV plants in India [74–76].

Modules can also underperform from day one if they are transported or

installed incorrectly, as has been often observed in India [76]. Other

components can have similar impacts on plant performance (tech-

no-commercial overviews are available in Refs. [51,54]). Uncertainty is

particularly high at the time of market creation and in environments

with low information about input parameters, such as irradiation,

temperature, component degradation, component peak performance

and resistance to environmental conditions, construction and installa-

tion capacities [51,54,72,77]. A mixture of low awareness and lack of

experience complements scarce publicly available information in

countries that kick-start solar PV [51,78].

Based on the above considerations, one can view more stringent

technical requirements in public auctions as a quality signal and de-

risking instrument to attract foreign investment [66,79]. More strin-

gent international quality standards try to tackle the underlying risk of

technical failure and related uncertainty about electricity yields. In

addition, international quality standards function as a proxy, which

signals high solar PV plant performance in a situation where no prior

information exists, information is expensive for international investors,

and trust in the institutional framework is low.

Hypothesis 2. Policymakers introduce international quality standards

as technical requirements in public auctions to attract foreign

investment.

3.4. International quality standards as technical requirements: a tool to

reduce risk exposure of the public sector?

The bathtub curve in Fig. 2 illustrates that technical failures in solar

PV plants occur mainly at the beginning (or even before operation starts,

e.g. malfunctional modules due to microcracks from incorrect trans-

portation) and at the end of their lifetime due to wear and tear [7].

As in a principal-agent model, the Indian government represented by

SECI (principal) delegates the task to build and operate a solar power

plant to the private company (agent) that offers the lowest bid price in a

public auction. The agent enters into an EPC plus O&M or BOO plus PPA

contract with the principal. There is a key difference between these two

types of contracts. Under EPC plus O&M contracts, the project developer

(agent) constructs, operates and maintains the solar PV plants only for a

limited number of years and then transfers ownership to SECI (prin-

cipal). Under BOO contracts, the project developer (agent) is responsible

for everything from construction to operation and assumes ultimate

ownership. The allocation of technical risk over time thus differs

significantly in these two contract arrangements. Fierce price competi-

tion in reverse auctions forces project developers to bid close to their

expected electricity costs per kilowatt hour. Low, winning bids can turn

into a curse if project developers are too optimistic, e.g. about the O&M

costs, particularly if they choose low-quality components to be more

price-competitive, or if interest rates change etc.

Since SECI ultimately assumes the risk of underperformance of the

solar plant over the lifecycle, EPCs have an incentive to ensure the short-

term performance and quality of solar plants. By contrast, EPCs have no

(economic) incentive to focus on quality beyond their O&M period. In a

BOO contract, remuneration is fully performance-based and the owner

has a strong incentive to maximize the output over the lifetime of the

plant, as it may take several years to amortize costs and generate profits.

In line with the principal-agent theory, SECI uses upfront payments,

sanctions, and performance targets to monitor and guarantee that the

power producers do not simply neglect their contractual obligations.

In section 2.1, underbidding and subsequent lower project realiza-

tion rates were highlighted as a problem for policymakers in reverse

auctions for renewable energy projects, including in India [5,23,26,30,

Fig. 2. Failure curve of a solar PV system, reprinted from Ref. [7], p.12.

F.A. Münch and A. Marian

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