Bidding for the Future: Efficient Auction Design during Financial Headwinds : A Comparative Study of UK and German Offshore Wind Auctions and Lessons for Norwegian Policymakers

Abstract

Offshore wind is increasingly recognized as a viable source of renewable energy and has great potential for international decarbonization. However, current supply-chain bottlenecks, inflation and interest rates have increased industry costs. Consequently, investment risk is higher, and increased compensation is required. This study investigates the auction design of the two leading European offshore wind markets, to establish best practices and ultimately provide recommendations on how Norway should approach the new market conditions. A comparative analysis finds that dynamic auctions have been successful in less mature markets, leading to price discovery and mitigating the winner’s curse. Strict prequalification criteria and penalties ensure bidder competence and financial capability. This leads to higher effectiveness, efficiency, and realization. It mitigates bidder’s real option strategies, while incentivizing auction participation. Shortening the application processes and state-covered grid connection reduces planning risks and lowers investment costs. Ceiling prices should consider technology costs and market conditions to ensure auction participation, project realization and limited support costs. Support mechanisms should include complimentary revenue streams for developers via commercial PPAs or merchant nose agreements. Germany has succeeded with a one-sided CfD and reduced capital expenditure, due to state-covered grid costs. This provides high upside potential and strategic real option value, compensating developers from new perceived risk. The UK, with a two-sided CfD and developer-covered grid costs, has seen failed auctions due to lack of compensation. Considering the current macroeconomic climate and objective of cost efficiency, the Norwegian government is recommended to have a holistic approach to auction design. Timely announced, dynamic auctions will allow for price discovery and avoid the winner’s curse. Facilitating electricity grid connection and shortening application processes will reduce uncertainty and planning risk. A two-sided CfD with a subsidy cap is advised, with increased, recalculated ceiling prices to internalize the current macroeconomic situation. Moreover, the government should include inflation-indexation of contracts, as well as complimentary revenue streams such as commercial PPAs. This may turn unprofitable projects into attractive prospects.