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Principles for the design of and bidding in Renewable Energy Auctions

Regulators and governments around the world use auctions to allocate scarce resources. Probably one of the most famous examples are spectrum auctions where radio frequencies are allocated to mobile telecommunications companies to provide services to consumers. Spectrum auctions have been scrutinized and optimized over years, providing rich insights into bidding strategy and the design of auctions. Thus, spectrum auctions offer several valuable lessons for the design and implementation of auctions in other markets, such as for renewable energy auctions.

The generation of renewable energy has become increasingly important for transitioning to green policies in Europe and all parts of the world. Renewable energy can be defined as the energy that are derived from natural resources which replenish faster than the rate at which they are consumed.1 Common types of renewable energy sources are solar, wind, geothermal, hydropower, ocean and biopower energy.

Regulators have been increasingly turning to reverse auction (i.e. procurement) designs to allocate projects or contracts for the generation of renewable electricity. In this context, auctions are used to support renewable energy generation or to purely allocate the rights to generate renewable energy and are used in the areas of (on-shore and off-shore) wind, solar and biomass among others. Typically, authorities also incorporate other elements such as a rigorous pre-qualification stage and penalties in the case of non-supply.

There is not one auction format that is optimal in all circumstances and all markets. A design that serves one objective may be detrimental to another. Also, some factors (for example, uncertainties regarding future market prices, or cost or value synergies across different projects) may be more important in some markets than in others. Auction theorists have therefore designed different auction formats to deal with this variety of circumstances. As we will argue in this paper the underlying auction principles are very similar and do apply across markets.

For both regulators and bidders, it is paramount that the appropriate auction format is selected. To achieve this, it is essential that the objectives of the regulators are articulated with clarity. Typically, bidders possess more comprehensive information regarding market conditions than regulators. Hence, it is crucial that bidders are afforded the opportunity to convey their perspectives on the suitable auction format.

In this paper we explain key considerations for the design of an auction in general, and in the market for renewable energies in particular. We also touch upon policy considerations that may inform not only the auction design but also the consultation phase which might be considered as a bargaining step between regulators and private parties.

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Any opinions expressed in this communication are personal and not attributable to the Competition Economists Group