Methodology to prepare for UK’s offshore wind Contract for Difference auctions

Abstract

In the UK, the Contract for Difference (CfD) subsidies for renewable energy generation are awarded through a competitive auction process. This paper simulates the most recent CfD auction for offshore wind, using a novel methodology to assist developers in preparing their bid strategy and for policymakers to test auction efficiency. The simulation’s results show developer’s leading strategy is to shade their bid to increase auction pay-off. A developer’s incentive to shade their bid depends on the project’s capacity and minimum bid price; the offshore wind farm Hornsea 3 has the greatest incentive to shade its bid as its optimum bid price is further from its cost price, and results in the highest expected value of additional auction pay-off. The median strike price estimated by the model is £39.23/MWh, and the most likely winners, as predicted from the simulations, are Hornsea 3, Inch Cape, East Anglia 3 and Norfolk Boreas. Published auction results show that the estimated strike price from the simulation is 5% higher than the £37.35/MWh awarded strike price; however, the model successfully predicted the winners. Further analysis of results demonstrates that developers adopted a risk-averse bidding strategy, bidding at a pre-determined floor (coexist) price, guaranteeing subsidy. As a result, £38 million of the subsidy budget was unused.