Renewable energy auctions – When are they (cost-)effective?

Abstract

European Member States increasingly use tenders combined with competitive bidding to allocate renewable electricity support payments to renewable electricity market actors. This article contributes to the European policy debate by exploring which principal design features and context factors increase or reduce the effectiveness and cost-effectiveness of renewable electricity auctions. Volume control is among the key aims of implementing an auction, but potentially low project realisation can harm reaching the targeted volume. Qualification requirements and/or penalties are useful auction design elements to increase the implementation rates of selected projects. However, there are risks associated with these measures, which in turn increase prices. Auctions also aim at increasing (static) cost-effectiveness of renewable electricity support, which may be influenced by three main factors: first, the level of competition in the auction; second, the mitigation of speculative over- or under-bidding; and third, the level of allocation and delivery risks borne by the bidders. The article explores the fundamental trade-off in auctions between encouraging high project implementation rates (to ensure volume control) and minimising the bidder’s risk (that may result in higher bidding prices). Based on theoretical insights and supported by empirical renewable electricity auction examples, it identifies factors that can influence the success of an auction but also shows there is no exact blueprint for a good auction design.