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Renewable auctions: Bidding for real options

Author

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  • Matthäus, David
  • Schwenen, Sebastian
  • Wozabal, David

Abstract

Procurement auctions for renewable energy support have become a standard policy instrument to stimulate investment in clean energy. Winning bidders have the right but not the obligation to realize their projects during a grace period following the auction. Currently, the nexus of award prices and the realization rate is not well understood in the literature. We combine auction theory and real options theory to model bidders who view the right to build subsidized renewable capacity as real option. Using asymptotic theory for multi-unit auctions, we derive optimal bidding strategies and analyze how auction design and bidder characteristics impact equilibrium bids, award prices, and realization rates. In particular, we show that bidders who value the flexibility of non-realization higher bid more aggressively and exhibit lower realization rates. We analyze determinants of these effects and illustrate how auction design can trade-off procurement cost and realization rates by adjusting pre-qualification payments and the grace period for construction. Finally, we test our results on real-world auctions in UK and Germany and show that our model explains auction outcomes and observed realization rates.

Suggested Citation

  • Matthäus, David & Schwenen, Sebastian & Wozabal, David, 2021. "Renewable auctions: Bidding for real options," European Journal of Operational Research, Elsevier, vol. 291(3), pages 1091-1105.
    • Handle: RePEc:eee:ejores:v:291:y:2021:i:3:p:1091-1105
    DOI: 10.1016/j.ejor.2020.09.047
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    Citations

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    Cited by:

    1. Côté, Elizabeth & Đukan, Mak & Pons-Seres de Brauwer, Cristian & Wüstenhagen, Rolf, 2022. "The price of actor diversity: Measuring project developers’ willingness to accept risks in renewable energy auctions," Energy Policy, Elsevier, vol. 163(C).
    2. del Río, Pablo & Kiefer, Christoph P., 2023. "Academic research on renewable electricity auctions: Taking stock and looking forward," Energy Policy, Elsevier, vol. 173(C).
    3. Münch, Florian Anselm & Scheifele, Fabian, 2023. "Nurturing national champions? Local content in solar auctions and firm innovation," Energy Policy, Elsevier, vol. 179(C).
    4. Yu, Xianyu & Ge, Shengxian & Zhou, Dequn & Wang, Qunwei & Chang, Ching-Ter & Sang, Xiuzhi, 2022. "Whether feed-in tariff can be effectively replaced or not? An integrated analysis of renewable portfolio standards and green certificate trading," Energy, Elsevier, vol. 245(C).
    5. Münch, Florian Anselm & Marian, Adela, 2022. "The design of technical requirements in public solar auctions: Evidence from India," Renewable and Sustainable Energy Reviews, Elsevier, vol. 154(C).
    6. Sheykhha, Siamak & Borggrefe, Frieder & Madlener, Reinhard, 2022. "Policy implications of spatially differentiated renewable energy promotion: A multi-level scenario analysis of onshore wind auctioning in Germany," Energy Policy, Elsevier, vol. 169(C).
    7. Didier Nibbering & Coos van Buuren & Wei Wei, 2021. "Real Options Valuation of Wind Energy Based on the Empirical Production Uncertainty," Monash Econometrics and Business Statistics Working Papers 19/21, Monash University, Department of Econometrics and Business Statistics.

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