Dealing With Uncertainty While Developing Bid Strategy For CFD Auctions

Abstract

Offshore Wind installed capacity has grown dramatically in recent years. In the UK, this success can in part be attributed to the CfD (Contracts for Difference), the UK government’s primary policy mechanism for subsidising low-carbon generation. This is a promising policy tool for achieving renewable targets. However, there are a number of risks involved for both auctioneer and bidders. Bidders are faced with many sources of uncertainty when analysing their project costs and future revenues, which is required in order to develop a bidding strategy. The uncertainty faced by auction participants can result in the non-realisation of projects, which poses a major risk to governments meeting their expansion targets. The auctioneer can take a number of measures to reduce the non-realisation of projects such as increasing the CfD contract length and limiting a wind farm’s exposure to volatile wholesale electricity prices. In this paper, a sensitivity analysis is carried out on a stochastic, agent-based modelling approach, which utilises game-theoretic principles to generate optimum bid strategies for generators attempting to win a CfD contract. The sensitivity analysis is conducted by replicating the Allocation Round 3 (AR3) as a base case. This auction was held in 2019 in the UK. Empirically derived stochastic data obtained from a previously validated proprietary cost modelling tool is used to map each agent to a real-life project that participated in AR3. The results show the importance of estimating the capacity factor and capital expenditure and thus highlight where resources to reduce uncertainty should be focused by auction participants. This paper then analyses the effect of increasing CfD contract length on the uncertainty experienced by bidders. A trade-off appears between significantly reducing uncertainty for bidders and increasing the net present value of support payments to developers. The results also show that in a number of high-medium economic growth scenarios, governments can expect to receive net positive payments from awarding CfD contracts to fixed-offshore wind developers. Revenue generated can be used to further subsided less-established technologies and deliver savings for electricity consumers.