Renewable energy auctions have become the dominant mechanism for procuring utility-scale renewable power worldwide. They are expected to drive nearly 60 percent of new renewable capacity additions between 2025 and 2030.
In many emerging markets and developing economies (EMDEs), auctions have successfully delivered competitive tariffs and mobilized international investment. Yet beneath the headline prices lies a more fundamental question: who carries the risks that make those prices possible?
According to IRENA’s latest assessment (Renewable Energy Auctions: Design for Risk Allocation report), renewable energy projects in EMDEs operate within layered risk environments that extend far beyond construction and resource variability. These risks fall broadly into two categories.
At the country level, risks include political and regulatory instability, currency volatility, utility non-payment, weak grid infrastructure, market demand uncertainty, and contract enforcement challenges. These can affect projects across all stages, from bidding to operation.
At the project level, developers face resource uncertainty, permitting delays, land acquisition challenges, social and environmental issues, and construction cost overruns.
To address these challenges, many governments have adopted what can be described as an “investor-first” de-risking model. Sovereign guarantees are commonly provided to backstop utility payment obligations and political risks. Power purchase agreements (PPAs) are often denominated in US dollars or euros to shield investors from currency depreciation. Liquidity facilities, letters of credit, and multilateral development bank (MDB) partial risk guarantees further reduce exposure to payment and convertibility risks.
These tools have been effective in lowering financing costs and attracting capital. However, they do not eliminate risk. They reallocate it.
Between 2016 and 2024, several EMDE currencies depreciated sharply. When PPAs are denominated in hard currency but revenues are collected in local currency, exchange-rate risk is effectively transferred to governments and utilities. Sovereign guarantees create contingent liabilities. Take-or-pay clauses shift market demand risk onto public utilities.
The result is a structural trade-off. Lower tariffs today may come at the cost of higher fiscal exposure tomorrow.
IRENA’s analysis of Zambia’s Scaling Solar programme demonstrates how concessional and public finance were instrumental in mobilizing private capital. The lesson is not that de-risking is misguided, but that it is never costless. Public balance sheets, foreign exchange reserves, and long-term debt sustainability must be considered as part of auction design.
This is where a shift from blanket de-risking to strategic risk allocation becomes essential.
Auctions are not merely price-discovery mechanisms. They are financial architecture decisions. Each design element — currency denomination, offtaker structure, qualification requirements, site specificity, compliance rules — determines how risk is distributed among developers, utilities, governments, consumers, and international financiers.
A smarter approach rests on several principles.
First, risks should be matched to institutional capacity. Construction and operational risks are best managed by developers. Grid planning and transmission risks belong with system operators. Currency risk, in highly volatile economies, cannot be sustainably absorbed by sovereign balance sheets alone and requires blended or shared solutions.
Second, risk allocation should evolve over time. In early auction rounds, stronger guarantees may be necessary to establish market confidence. As institutional capacity improves and domestic capital markets deepen, exposure can gradually shift away from full sovereign backstopping.
Third, currency mismatches must be addressed structurally. Local currency financing ecosystems, partial indexation mechanisms, and regional risk-sharing facilities can reduce systemic foreign exchange exposure.
Fourth, diversified offtake models, including multi-buyer structures and corporate PPAs, can reduce reliance on single state-owned utilities and distribute counterparty risk more effectively.
Finally, auctions should be embedded within broader industrial and grid planning strategies. Well-designed socio-economic requirements and renewable energy development zones can reduce long-term supply chain vulnerabilities and improve system integration, strengthening both resilience and domestic value creation.
For energy transition policymakers and practitioners, the key insight is: the success of renewable auctions cannot be measured solely by the lowest tariff. It must also be assessed by their impact on fiscal sustainability, currency stability, grid reliability, and long-term industrial development.
The first generation of auctions in EMDEs focused on heavy de-risking to unlock capital flows. The next generation must focus on calibrated, transparent, and sustainable risk sharing.
Megawatts matter. But so does how risk is carried.
