In reverse auctions, a government establishes a fund to compensate energy companies for the early retirement of coal-fired power plants. Asset owners submit bids for the amount of compensation they require to retire their coal power plant early. As this is a reverse auction, there are many sellers and only one “buyer” (typically the government); in general, the winning bidders are those that submit the lowest bids. 

Case study

Germany's Coal Reverse Auction



Key elements

• A series of tenders held from 2020 through 2027. (Plants remaining in 2027 are subject to forced closure without compensation).

• Each tender includes a maximum bid price (e.g.;€165,000 per MW for the first tender, €155,000 for the second tender). This maximum price tends to decline with each successive tender, thus incentivizing early participation in the programme. 

• Bid prices are adjusted by an emissions factor to encourage the sale and retirement of higher-emitting plants.

• Through February 2022, four tenders have been completed, securing the early retirement of nearly 9 gigawatts of coal-fired power capacity.

• Transmission grid operators are required to check whether the plant is needed for the stability of the power system before it can be permitted to retire entirely.

Benefits of this programme

• Government funding eliminates financing risk, while the reverse auction structure helps minimize the cost to taxpayers.

• Published prices for tender results provide coal plant owners with clear market signals about the value of “early retirement”.

• Because the auctions are run on a fixed schedule, the government maintains control over the timing of plant retirements. 

Enabling conditions 

• Government has the fiscal capacity to acquire the asset for early retirement.

• Clear policy and regulatory framework are needed to motivate asset owners to participate in the auctions, creating a competitive pricing dynamic, which dampens prices paid and limits the cost to taxpayers.