The Use of Auctions for Decommissioning Coal Power Globally

21 October 2022
By Benjamin Chee and Juli Raventos

NERA Managing Director Benjamin Chee and Senior Analyst Juli Raventos examined the potential use of auctions as a price discovery mechanism facilitating accelerated decommissioning of the global coal fleet in a report prepared with the World Bank and the RMI.

Coal power plant decommissioning is part of a multifaceted exercise in which auctions can play an important supporting role. The report provides a framework to help stakeholders understand the potential role of auctions in the coal-to-clean energy transition. This framework suggests the likelihood of a coal-to-clean transition in the near term is a first-order question. After this is determined, it is important to ensure there are enough bidders (and thus, sufficient competition) for an effective auction and the auction product is sufficiently attractive (considering any significant barriers to and incentives for bidder participation).

Generally, issues affecting the broader energy transition may limit the success of an auction mechanism. Factors including the economic assistance for a just transition for affected workers and communities, site remediation, grid reliability, and replacement power from clean supply alternatives must be addressed in parallel to support the broader coal-to-clean transition.

The most complicated step in the development of an auction process is the creation of an attractive auction product, which must account for facets of the environment in which the auction resides. If the auction product is not more attractive than the status quo, there will be insufficient auction participation, even with many eligible prospective bidders. The analysis of an attractive package must consider cost drivers, barriers, and other incentives that may challenge the status quo.

Given the speed and scope of the transformation needed and the scarcity of public funds, it is important to allocate resources efficiently to ensure the energy transition is feasible on an ongoing basis. Auctions represent an opportunity to determine the “price” of coal power plant closures through competition and accordingly allocate funding to minimize costs and maximize the impact of public finance. The auction process, including the development of requirements and material obligations, requires a high degree of standardization. If designed well, it could allow for a coal transition mechanism to be allocated efficiently and transparently on a least-cost basis.