This knowledge note singles outauctions as an important mechanism that has been implementedin a growing number of countries in recent decades. Itfeatures a case study of auctions designed to promote thegeneration of electricity from renewable sources in Brazil.The Brazilian experience with wind energy auctionsillustrates that even carefully designed policies often mustbe reconsidered in the light of a complex and changingenvironment. Many considerations need to be taken intoaccount to ensure competitive prices while also deliveringthe required renewable energy supply. This case study isinteresting, because Brazil's initial success withdeveloping wind capacity had unforeseen consequences.Challenges introduced in the first stage of wind powerdevelopment had to be solved in the second. The chiefchallenges were (i) the Brazilian system had to be able tobalance supply and demand more accurately; (ii) investorswere overoptimistic about the amount of electricity able tobe generated; and (iii) the government's arrangementsfor coordinating the planning of generation and transmissionleft too little room for error. The benefits offered to theauctioned plants were reduced, as was government involvementin planning and coordinating transmission expansion. The keylesson from this case study is that existing policies shouldbe challenged and revised in response to a changing environment.
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