| dc.description.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. | en_US |
