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The Importance of Penalties and Pre-qualifications: A Model-based Assessment of the UK Renewables Auction Scheme

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  • Marijke Welisch

Abstract

This paper assesses the multi-technology auctions for Contracts for Difference (CfDs) in the UK, with a special focus on how pre-qualifications and penalties affect bidders' behaviour, risk aversion and bidding strategies and thus the auction outcomes in terms of prices and project implementation probability. The auctions are modelled to closely represent the auction design foreseen by the implementing agency, the Department for Business, Energy and Industrial Strategy (BEIS). Two alternative designs are presented: In the first one, bidders bid their true costs as a drop-out after being awarded would be penalised. The second one does not include a penalty. In that case, bidders are modelled with a cost function that includes a higher level of uncertainty. The model results show that low pre-qualifications and low or no penalties lead to an increased drop-out of agents after being awarded. For the policy-maker this implies a lower realisation rate for the auctions. Furthermore, the non-penalty case does not yield lower prices compared to a case with a stricter penalty/pre-qualification system in place

Suggested Citation

  • Marijke Welisch, 2018. "The Importance of Penalties and Pre-qualifications: A Model-based Assessment of the UK Renewables Auction Scheme," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    • Handle: RePEc:aen:eeepjl:eeep7-2-welisch
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    Cited by:

    1. Helena Martín & Sergio Coronas & Àlex Alonso & Jordi de la Hoz & José Matas, 2020. "Renewable Energy Auction Prices: Near Subsidy-Free?," Energies, MDPI, vol. 13(13), pages 1-21, July.
    2. Kruger, Wikus & Nygaard, Ivan & Kitzing, Lena, 2021. "Counteracting market concentration in renewable energy auctions: Lessons learned from South Africa," Energy Policy, Elsevier, vol. 148(PB).
    3. Anatolitis, Vasilios & Azanbayev, Alina & Fleck, Ann-Katrin, 2022. "How to design efficient renewable energy auctions? Empirical insights from Europe," Energy Policy, Elsevier, vol. 166(C).
    4. Welisch, Marijke & Poudineh, Rahmatallah, 2020. "Auctions for allocation of offshore wind contracts for difference in the UK," Renewable Energy, Elsevier, vol. 147(P1), pages 1266-1274.
    5. Kell, Nicholas P. & van der Weijde, Adriaan Hendrik & Li, Liang & Santibanez-Borda, Ernesto & Pillai, Ajit C., 2023. "Simulating offshore wind contract for difference auctions to prepare bid strategies," Applied Energy, Elsevier, vol. 334(C).

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    JEL classification:

    • F0 - International Economics - - General

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