Designing renewable energy auctions for high realization probability — CfD and payment-only auctions

In recent years, different instruments for renewable energy expansion have been debated. Among the support and hedging instruments, two-sided contracts for difference (CfDs) have become the default in many countries and are promoted by the European Commission. On the other hand, payment-only auctions have also become established, where the electricity sales are unregulated, but the winners must pay for the right to build energy plants. Focusing on a high realization probability and the induced welfare effects, we compare two-sided CfDs with payment-only auctions. Contrary to the conventional wisdom, the non-realization risk is higher with auctioned CfDs than with payment-only auctions and is exacerbated by risk aversion, when developers can cope with both options. CfDs are particularly useful when developers need support for implementing their projects. Against this backdrop and considering asymmetric information, i.e., developers know best the economic conditions of their projects, we propose a design in which developers decide competitively between a CfD auction and a payment-only auction and which enhances the realization probability.