Auctions for Renewables: Does the Choice of the Remuneration Scheme Matter?

Abstract

Auctions are increasingly used to support renewable energy sources (RES). The choice of the remuneration scheme is one of the major design challenges policymakers face. This paper analyzes the effects of remuneration schemes on RES auctions' success in markets with imperfect competition. I develop a game-theoretical auction/operation framework to model the feedback effects between the spot market's strategic behavior and the auction stage's bidding behavior. The analysis indicates that policymakers concerned about true-cost bidding, allocative efficiency, spot price, total payments to RES, and non-realization risk may prefer feed-in-tariff (FIT) remuneration. However, feed-in-premium (FIP) remunerations may outperform FIT ones from a social welfare perspective, particularly in markets with dirty technologies at the margin. A machine-learning-based simulation strategy is also presented, indicating that, for an auction for 14 GW of onshore wind in France, FIP auction with a winning incumbent leads to 1.40% higher prices than FIT ones.

Secret Bilateral Forward Contracting*

“…Other dimensions of policy are the design of the renewable compensation scheme(Brown and Eckert 2020;Darudi 2023), and the question how a regulator should distribute forward contracts among asymmetric firms (de Frutos and Fabra 2012).22 Stated with the terminology ofFarrell and Shapiro [1990], such mergers make it possible to reallocate production across facilities but do not generate synergies.© 2023 The Authors. The Journal of Industrial Economics published by The Editorial Board of The Journal of Industrial Economics and John Wiley & Sons Ltd.…”