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Simulating offshore wind contract for difference auctions to prepare bid strategies

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  • Kell, Nicholas P.
  • van der Weijde, Adriaan Hendrik
  • Li, Liang
  • Santibanez-Borda, Ernesto
  • Pillai, Ajit C.

Abstract

This paper presents a novel agent-based, stochastic model, which uses game-theoretic principles to simulate Contract for Difference (CfD) auctions. The framework has use cases and implications for policymakers and renewable generators alike, and can be used by developers to prepare bidding strategy and for policymakers to empirically test auction design. The model is demonstrated through replication of the offshore wind CfD Allocation Round 3 (AR3) pot, and utilises high-level cost modelling distribution data to estimate bid prices for the competing projects. The model produces a distribution of most likely results which better categorises uncertainty, and through comparison of AR3 and simulation results, demonstrates how outcomes can be predicted with reasonable confidence by developers. Analysis show that the transmission network and grid connection charges are a significant barrier for projects in some geographical regions to be awarded a CfD contract, potentially hindering renewable deployment in those areas. Moreover, this paper demonstrates how players can use probability theory to select an optimum bidding strategy which maximises expected profit while factoring the uncertainty inherent in CfD auctions. Results show that a 1200 MW wind farm development can increase potential profits by £135 million over the CfD contract length in exchange for a 25 p.p. chance reduction in being awarded a subsidy.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:appene:v:334:y:2023:i:c:s0306261923000090
    DOI: 10.1016/j.apenergy.2023.120645
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    References listed on IDEAS

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    Cited by:

    1. Kell, Nicholas P. & Santibanez-Borda, Ernesto & Morstyn, Thomas & Lazakis, Iraklis & Pillai, Ajit C., 2023. "Methodology to prepare for UK’s offshore wind Contract for Difference auctions," Applied Energy, Elsevier, vol. 336(C).
    2. Christian Manuel Moreno Rocha & Jorge D. Pertuz Ortiz & Neyder A. Rodriguez Ibanez, 2023. "A Diffuse Analysis Based on Analytical Processes to Prioritize Barriers in the Development of Renewable Energy Technologies in Alignment with the United Nations Sustainable Development Goals: Evidence," International Journal of Energy Economics and Policy, Econjournals, vol. 13(4), pages 481-195, July.

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