CE05 - Une énergie durable, propre, sûre et efficace

The Design of Auctions and Contracts for Renewable Energies: a RISK-sharing perspective – DACRERISK

The Design of Auctions and Contracts for Renewable Energies: a RISK-sharing perspective – DACRERISK

One of the main economic challenges in the large scale development of renewable energies is how to share risks between public and private entities.

Objectives

The aim of the project is to provide some quantitative insights on the pros and cons of the existing rules to subsidy wind and solar energies and in proposing innovative directions in the way to modify them. The central characteristic of the auction and contract design is the payment rule that specifies the remuneration/subsidy received by the auction winners for each MWh produced and this not only as a function of his bid but also as a function of his total production.

The novelty of the approach will consist in entering into the details of the rules, namely at a micro-level. In a similar way as the incidence of a tax may have the opposite effect as the one presumed by policy makers, the impact of an auction mechanism on the different actors is not always intuitive. Another novelty of the project is that the output from meteorological models and the technical characteristics of renewable technologies will be used either from an empirical perspective to derive controls/instrumental variables or to calibrate theoretical models to get credible order

The conclusion of the work «Pitfalls of Insuring Production Risk: a Case Study on some Wind Power Auctions in France” (Laurent Lamy et Clément Leblanc) has very concrete implications in terms of public policy. Our results allow us to conclude that it is a rather perilous idea to want to deviate from subsidies which are not linear in the quantity produced by insuring the producers against the uncertainty of intermittent production. If ever such policies are put in place, then the reference production must not be the result of a self-declaration but rather have it certified by a third party or directly by the public authorities, possibly according to rigid rules.

1) Analysis of the procurement in India: those auctions present various peculiar features allowing several angles of investigation (eg, the endogenization of the quantities auctioned via a qualification phase).
2) Analysis of the insurance contracts with respect to the market prices (in European auctions): prospective analysis of the trade-off between the incentives to produce at the right time and risk premiums
3) Analysis of the ex post performance (delays for commissioning, productivity) of renewable energy installations in Brazil with regard to auction data.

***

One of the main economic challenges in the large scale development of renewable energies is how to share risks between public and private entities. There is a lot of heterogeneities in the existing regulations across the world with respect to those risks and there is no sign that regulations are converging. Some contracts like Feed-In-Tariffs (FIT) hedge entirely against market price fluctuations. But some countries like Germany have recently abandoned them. At the opposite of the spectrum of possible contracts are Feed-In-Premium (FIP) where the subsidy is a bonus that should be added to the commercialization of the production which is left entirely to the producer’s responsibility. Concerning production risks (e.g. due to wind variability across years and also to possible errors/bias in the estimation of the wind potential of the production sites), producers are -by contrast- typically not hedged. Nevertheless, there are some notable exceptions in some auctions in France, Brazil and from 2017 in Germany.

The aim of the project is to provide some quantitative insights on the pros and cons of the existing rules to subsidy wind and solar energies and in proposing innovative directions in the way to modify them. The central characteristic of the auction and contract design is the payment rule that specifies the remuneration/subsidy received by the auction winners for each MWh produced and this not only as a function of his bid but also as a function of his total production. A complementary aspect of the payment rule is the length of the contract for which it is not clear why it should be related to the life-time of the installation. The aforementioned instruments are not specific to environments where contracts are assigned through auctions. In an auction, a new dimension of the design is how the remuneration rule depends on the submitted bids. Finally, we should not lose an eye that the problem does not reduce to promoting efficiency at a marginal level (producing additional MWh of green energies at the lowest cost) but also at a global level where the objective is to induce an efficient energy–mix.

This market design problem is complex because it involves (according to economic terminology) jointly moral hazard, adverse selection and risk aversion. In other words, the problem goes beyond the economist’s standard toolbox and efficiency is subject to complex trade-offs. On the one hand, it seems desirable to put all the risks on the public authorities given that private investors’ interest rates are higher under risk than for public authorities. On the other hand and as it is well-known in the economic literature about insurance, de-risking instruments could induce adverse consequences by reducing the incentives to make the most rewarding efforts for society (e.g. to find the most windy sites). On the top of this classic (which does not mean trivial) trade-off in economics, there is the additional issue of selecting the most efficient firms/projects that candidate to those auctions and of encouraging the most efficient firms/projects to participate. Furthermore, from an econometric perspective, it is very challenging to estimate the order-of-magnitudes associated to those incitation issues.

The novelty of the approach will consist in entering into the details of the rules, namely at a micro-level. In a similar way as the incidence of a tax may have the opposite effect as the one presumed by policy makers, the impact of an auction mechanism on the different actors is not always intuitive. Another novelty of the project is that the output from meteorological models and the technical characteristics of renewable technologies will be used either from an empirical perspective to derive controls/instrumental variables or to calibrate theoretical models to get credible order

Project coordinator

Monsieur Laurent LAMY (Lamy Laurent)

The author of this summary is the project coordinator, who is responsible for the content of this summary. The ANR declines any responsibility as for its contents.

Partner

CIRED Lamy Laurent

Help of the ANR 251,041 euros
Beginning and duration of the scientific project: February 2019 - 48 Months

Useful links

Sign up for the latest news:
Subscribe to our newsletter