Designing renewable energy auctions for high realization probability — CfD and payment-only auctions

In recent years, different instruments for renewable energy expansion have been debated. Among support and hedging instruments, two-sided contracts for difference (CfDs) have become the default in many countries and are promoted by the European Commission. At the same time, payment-only auctions (e.g., seabed lease auction for offshore wind) have also become established, where electricity sales are unregulated, but winners pay for the right to build and operate energy plants. Considering both cost uncertainty in the form of post-auction shocks and revenue uncertainty, we compare two-sided CfDs with payment-only auctions. Contrary to conventional wisdom, the non-realization risk is higher with auctioned CfDs than with payment-only auctions and is exacerbated by risk aversion, when developers can cope with both options. This result is reinforced when payments are due before the implementation decision. It can be altered in either direction by information updates about the future electricity market during the implementation period. Auctioneer’s expected costs are higher in payment-only auctions if the bidders are risk-averse or risk-neutral and have higher costs. ... mehrThus, there is a trade-off for the auctioneer between realization and revenue. CfDs are particularly useful when developers need support or hedging for project implementation. Against this backdrop and considering asymmetric information, i.e., developers know best the economic conditions of their projects, we propose a design in which developers decide competitively between a CfD auction and a payment-only auction and which enhances the realization probability.