Simulating offshore wind contract for difference auctions to prepare bid strategies

Nicholas P. Kell, Adriaan Hendrik van der Weijde, Liang Li, Ernesto Santibanez-Borda and Ajit C. Pillai

Applied Energy, 2023, vol. 334, issue C, No S0306261923000090

Abstract: This paper presents a novel agent-based, stochastic model, which uses game-theoretic principles to simulate Contract for Difference (CfD) auctions. The framework has use cases and implications for policymakers and renewable generators alike, and can be used by developers to prepare bidding strategy and for policymakers to empirically test auction design. The model is demonstrated through replication of the offshore wind CfD Allocation Round 3 (AR3) pot, and utilises high-level cost modelling distribution data to estimate bid prices for the competing projects. The model produces a distribution of most likely results which better categorises uncertainty, and through comparison of AR3 and simulation results, demonstrates how outcomes can be predicted with reasonable confidence by developers. Analysis show that the transmission network and grid connection charges are a significant barrier for projects in some geographical regions to be awarded a CfD contract, potentially hindering renewable deployment in those areas. Moreover, this paper demonstrates how players can use probability theory to select an optimum bidding strategy which maximises expected profit while factoring the uncertainty inherent in CfD auctions. Results show that a 1200 MW wind farm development can increase potential profits by £135 million over the CfD contract length in exchange for a 25 p.p. chance reduction in being awarded a subsidy.

Keywords: Contract for difference; Renewable energy auctions; Game theory; Bid Strategy; Offshore wind; Agent-based modelling (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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DOI: 10.1016/j.apenergy.2023.120645

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