An appraisal of the CfD auctions in the UK

The UK CfD auction scheme to support renewable energy investment provides an interesting research subject. In the second auction round, in 2017, unexpected low price levels for the less mature technologies, especially offshore wind, have been observed. Costs of offshore wind have been on a descending cost trajectory but there might be also other reasons for such a low clearing price. A possible explanation is that a non-stringent penalty for failure to deliver in the CfD auctions along with long lead time turns an awarded auction into sort of a “real option” for developers.

The question resulting from this is does the UK’s RES auction framework meet its objectives of efficiency and effectiveness? Or does it rather provide a new hedging opportunity for investors? An empirical analysis of the auction outcomes provides the basis for an analysis of the overall efficiency, benefits and potential pitfalls of the scheme, taking into account the insights from stakeholder consultation and international experience. This analysis will further be complemented by insights from real option and risk analysis in the (renewable) energy sector as well as agent-based simulations using a previously established model if necessary.

As a result, the paper will provide design suggestions to increase the efficiency and effectiveness of a future auction design or changes outside of the auction design.

By: Marijke Welisch

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