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The price-bidding strategy for investors in a renewable auction: An option games–based study

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  • Zhu, Lei
  • Li, Li
  • Su, Bin

Abstract

This paper presents a preemption game model based on real option theory to analyze the optimal bidding price for investors participating in a renewable auction. We studied how investors each decides their own optimal bidding price, with preemption by rivals and incomplete information, to balance their expected profits and ability to hedge risk. We demonstrate that adjusting the bidding price to hedge the risks from adverse market conditions can equal that of choosing a flexible investment time based on the standard real option model. The unique Bayesian Nash equilibrium of the game constituted with the optimal bidding price of each investor is also characterized. The quantitative solution to the model is provided, with integration of least squares Monte Carlo, and in the case study we calculate the optimal bidding price of offshore wind power concessions in China. An interesting finding in the quantitative evidence is that, although the optimal bidding price is close to zero net present value if the number of participants is large, with consideration of risk-hedging ability, investors may tend to play a hostile bid, which shows that a large number of participants may do harm to some renewable projects that are not mature enough.

Suggested Citation

  • Zhu, Lei & Li, Li & Su, Bin, 2021. "The price-bidding strategy for investors in a renewable auction: An option games–based study," Energy Economics, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:eneeco:v:100:y:2021:i:c:s0140988321002371
    DOI: 10.1016/j.eneco.2021.105331
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