Selection bias in multi-technology auctions: How to quantify and assess efficiency implications in renewable energy auctions

Abstract

We develop a concept to identify and quantitatively assess technology selection bias in multi-technology renewable energy auctions. We show that simple price rules are insufficient to efficiently select winning projects in multi-technology tenders when they incorporate individual costs of producers only, and exclude system effects, market benefits and external costs. With our concept of quantifying unit social value, all relevant external elements can be incorporated in the evaluation. The introduction of an objective measure (as difference of differences between unit social value and auction bid prices) allows the quantitative assessment of systematic selection bias between technologies under different remuneration designs. We illustrate our concept by applying it to generic European renewable energy technologies (wind and solar energy) and major applied remuneration types (contract-for-difference and fixed premium schemes). We also show that are concept is applicable for real auction data, by presenting a case study about Italy. The main conclusion of the study is that selection by price only, can constitute a systematic bias for all investigated remuneration designs. Both schemes are in our case biased toward a given technology. The internalisation of external cost may not necessarily lead to better social outcomes in the selection of auction winners, as it can be overshadowed by the initial bias of the chosen remuneration design. We conclude that considerate design, including the potential differentiation of rules, e.g., through introduction of a technology bonus, to minimise selection bias, and careful monitoring of the competitive situation between participating technologies in a multi-technology auction are required to ensure efficient selection.