Econonomics of Energy and Environmental Policy

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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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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.Keywords: Renewable Energy, Auction Theory, Agent-Based-Simulation, Energy Policy
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JEL Codes:Q54: Climate; Natural Disasters and Their Management; Global Warming, H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies, O13: Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products

Keywords: Renewable Energy, Auction Theory, Agent-Based-Simulation, Energy Policy

DOI: 10.5547/2160-5890.7.2.mwel

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Published in Volume 7, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


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