NERA Economists Provide Recommendations to the Netherlands Ministry of Economic Affairs and Climate Policy for Offshore Wind Farm Auctions

By Richard Marsden, Dr. Soren Sorensen, and Daniel Radov

The Situation

The Netherlands Ministry of Economic Affairs and Climate Policy (“the Ministry”) is exploring the option to hold auctions for permits to develop offshore wind farms. Unlike previous awards, awardees would pay for site permits rather than receive subsidies, and qualifying bids would be evaluated on price rather than comparative criteria.

NERA's Role

The Ministry retained NERA to prepare a report that reviews the Ministry’s objectives for running auctions and, based on analysis of the industry situation, relevant literature, and case studies, presents recommendations on the optimal auction formats for one or two permit auctions. The report was co-authored by NERA Managing Director Richard Marsden and Associate Director Dr. Soren Sorensen, who specialize in auction design and implementation, and Director Daniel Radov, who specializes in energy and environmental economics.

The Result

The key findings of the report highlight the objectives of the Ministry’s auction and the auction format. Holding a well-designed and efficient auction that raises “optimal revenues” is likely to be the best approach to support the policy objectives related to roll-out, cost reduction, and promotion of competition and innovation. The authors recommend the Ministry adopt a single, common auction format that can be adapted, through variation of appropriate auction parameters, to address predictable changes in supply and demand of permits across auctions. The report’s proposed format is a multi-round ascending bid format (MRA), which borrows features from both the simultaneous multiple round ascending auction (SMRA) and clock auction, two widely used auction formats.

The uncertain value of the wind farm lease led the authors to recommend a multi-round auction, which helps bidders get a better sense of what the lease is likely to be worth. In addition, the authors note that the government had specified that the auction should offer the lease in exchange for a fixed lump-sum payment by bidders. This differs from the format of the current subsidy auctions, which offers bidders variable support per MWh of output. As a result, there is a need to consider the transition from one regime to the other across the “zero bid” boundary.