Auction-theoretic aspects of cross-border auctions
D6.2, July 2019
Cross-border renewable energy auctions are a topic of growing interest for policymakers, but remain under-analysed. In cross-border auctions, projects located outside of the auction-conducting country can participate and compete for support. There are numerous options for designing cross-border auctions for renewable energy support. This paper examines how opening auctions to projects in other countries influences both the allocative efficiency (i.e., projects with the lowest generation costs are awarded) and the resulting award prices. A conceptual categorization is developed with three distinct types of cross-border auctions, each with different degrees of openness and implications for auction outcomes. The types are: Joint Auctions, where two countries implement a common auction scheme, open to projects from both countries, mutually opened auctions ("Mutual Auctions"), a scenario in which both countries open their auction schemes, and unilaterally opened auctions ("Unilateral Auctions"), where both countries conduct auctions but only one country opens its support scheme to foreign projects. Furthermore, we evaluate the outcomes of Separate Auctions, in which two countries conduct their auctions independently, while only domestic projects are allowed to participate. Auction-theoretic modelling shows that Joint Auctions can achieve both allocative efficiency and moderate award prices. However, a complex implementation process and necessary bi-lateral coordination might make this option difficult to realise. Sequential Mutual Auctions, i.e., when the open auctions are conducted one after another and with enough time in between the auctions and not within a very short time frame, lead to similar outcomes, but with less administrative effort, since both participating countries can choose their own auction design. The remaining design choices all show a low probability of allocative efficiency and might lead to higher awarded prices. More generally, the analysis shows that parallel auctions (where project developers must choose in which auction they want to participate and cannot participate in both) tend to decrease the efficiency of a support scheme.