Abstract
Procurement auctions for renewable energy support have become a standard policy instrument to stimulate investment in clean energy. Winning bidders have the right but not the obligation to realize their projects during a grace period following the auction. Currently, the nexus of award prices and the realization rate is not well understood in the literature. We combine auction theory and real options theory to model bidders who view the right to build subsidized renewable capacity as real option. Using asymptotic theory for multi-unit auctions, we derive optimal bidding strategies and analyze how auction design and bidder characteristics impact equilibrium bids, award prices, and realization rates. In particular, we show that bidders who value the flexibility of non-realization higher bid more aggressively and exhibit lower realization rates. We analyze determinants of these effects and illustrate how auction design can trade-off procurement cost and realization rates by adjusting pre-qualification payments and the grace period for construction. Finally, we test our results on real-world auctions in UK and Germany and show that our model explains auction outcomes and observed realization rates.
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