Quick Facts
What reverse auction is
Reverse auction is the dominant tariff discovery mechanism for solar projects in India. The process involves multiple bidders competitively lowering their tariff bids in real time, with the lowest final bid winning the contract.
The mechanism is “reverse” because unlike conventional auctions (where buyers bid up the price), in reverse auction sellers (developers) bid down the price. This dynamic has been highly effective at driving solar tariffs lower as multiple developers compete aggressively for awards.
The mechanism is administered by SECI for inter-state projects, state DISCOMs for intra-state projects, and other procurers for sector-specific tenders. The transparency and competitive dynamics have made reverse auction the standard mechanism for utility-scale solar tendering in India.
Reverse auction process
The typical reverse auction process:
Tender release: Specifications, location, capacity, terms, qualification criteria.
Bidder pre-qualification: Bidders qualify based on technical and financial criteria.
Initial sealed bid: Pre-qualified bidders submit sealed initial tariff bids with EMD.
Bid opening: Initial bids opened. Range and starting bid level disclosed (sometimes).
Auction day: Online platform activated.
Real-time bidding: Bidders progressively reduce their bids. Lowest current bid (L1 indicator) displayed.
Bid decrement: Minimum reduction per new bid (typically Rs 0.01 to Rs 0.05 per kWh).
Time extension: If new bids occur near close, time extends.
Auction close: When no new bids in extension period, auction closes.
L1 declaration: Lowest final bid declared L1.
Award: LOA issued to L1 bidder.
PPA signing: 25-year PPA at L1 tariff.
The auction is conducted on electronic platforms designed for transparency and prevention of collusion.
Reverse auction dynamics
Several dynamics shape reverse auction outcomes:
Competitive intensity: More bidders typically yield lower tariffs. SECI tenders with 10+ bidders show steep price drops.
Strategic behaviour: Bidders may bid aggressively to secure award or hold back to gauge competition.
Last-minute bidding: Many bidders submit late bids when patterns become clearer. Time extension provisions prevent this from disrupting the auction.
Cost reality: Aggressive bidding may exceed sustainable cost reductions, leading to project distress. The 2017-2018 period saw very aggressive bidding followed by some project delays.
Cost projections: Bidders factor expected future cost reductions in 18 to 24 month construction window.
Risk perception: Higher perceived risk (land issues, evacuation, off-take) raises bids.
Tariff discovery trends
Reverse auction has produced remarkable tariff trends in India:
2011: First major NSM tender at Rs 12.16 per kWh.
2015: Rs 5 per kWh range.
2017: Rs 2.97 per kWh (record at the time).
2020: Rs 2.36 per kWh.
2024: Rs 2.50 per kWh range.
The downward trend reflects both genuine cost reductions and intense competition. Some 2017-2018 bids may have been below sustainable cost, leading to subsequent project distress in some cases.
Recent stabilisation around Rs 2.50 reflects more realistic bidding patterns and the need for sustainable economics.
Bid bond and performance guarantee
To ensure bid seriousness and project completion:
Bid bond (EMD): Submitted with bid. Typically Rs 5 to 50 lakh per MW. Forfeited if bidder withdraws.
Performance bank guarantee: After award. Typically Rs 25 to 50 lakh per MW. Forfeited if project commissioning delays beyond agreed milestones.
PCG (Payment Collection Guarantee): For some PPAs. Provides payment security.
These mechanisms ensure bidders are committed to their tariffs and complete projects on time.
Common reverse auction situations
Multiple aggressive bidders: Tariffs drop rapidly to thin margins.
Limited bidders: Less competition; tariffs higher.
Tender-specific challenges: Issues like land or evacuation can deter bidders, raising tariffs.
Market sentiment: Bidding patterns reflect broader market sentiment.
Strategic positioning: Some bidders bid aggressively to enter the market; others to capture specific projects.
Common reverse auction mistakes
Aggressive bidding without business case. Below-cost bids lead to project distress.
Insufficient site due diligence. Land, evacuation, water issues not adequately assessed.
Underestimating construction costs. Cost overruns hurt aggressive bidders.
Missing PPA implications. Long-term commitments require careful evaluation.
Ignoring connection costs. Connection charges separate from tariff.
Inadequate bid bond planning. Forfeiture costs.
Best practices
For bidders:
Detailed cost models with sensitivity analysis.
Site-specific due diligence before bidding.
Conservative assumptions for risks.
Multiple project options to manage tender risks.
Strong bidding team with auction experience.
For SECI/DISCOM:
Clear tender specifications.
Reasonable reserve tariffs.
Transparent evaluation.
Realistic commissioning timelines.
Strong bid bonds.
For analysts:
Monitor tariff discovery patterns.
Compare bid prices to project economics.
Identify trends in solar pricing.
Standards and references
Solar reverse auctions follow MNRE TBCB guidelines and SECI tender protocols. CERC RE guidelines provide regulatory framework. Tender documents specify all terms including reserve tariff, bid bond, performance guarantee, and PPA terms.
Related glossary terms
Key takeaways
Reverse auction is the dominant tariff discovery mechanism for solar projects in India, where multiple developers competitively lower their tariff bids in real time with the lowest final bid winning. The mechanism has been highly successful, driving Indian solar tariffs from Rs 12-15 per kWh in 2010 to Rs 2.50 per kWh and below by 2024. The process involves bidder pre-qualification, sealed initial bids, real-time online auction with time extensions, and L1 award. Aggressive bidding has occasionally led to project distress; sustainable bidding requires sound business cases and risk management.