Erasmus Uni, Royal Haskoning DHV Advise on Optimal Bidding Strategy in Dutch OW Auctions

Erasmus University Rotterdam and Royal Haskoning DHV have studied the optimal bidding strategy in Dutch offshore wind auctions.

Bidders might bid too high and lose the auction, or bid too low and don’t get the expected return they planned. One can minimize these risks by basing their offer on knowledge about auctions combined with valuation skills as well as knowledge and expertise in the market, Erasmus University and Royal Haskoning DHV said in a conclusion of the study.

The study is a sequel to an earlier research into cost efficient financing of offshore wind in 2013 and 2014. Among other things found was that the “historically low ECB interest rates” should be used to lower the financing cost of offshore wind parks.

The Borssele area is the first of many by the government-determined wind farm sites that are being auctioned. The auctioning of Borssele I and II with a combined capacity of 700MW will begin in December 2015. Winner is selected according to the offered price. The auction winner receives a subsidy next to the “wind license”, which is the exclusive right to build and develop the wind park.

Researchers state that contending in a combinatorial closed-offer auction is complex. The lower the bid, the bigger the chances are at winning the auction. But also, the profit declines with receiving less subsidy. A trade-off exists between the chance of winning and profit margin.

Another important decision for bidders to make is whether to enter 1, 2 or 3 simultaneous offers. The possibility exists to make an offer for lot I or lot II, but also to make a combined offer for I and II together. At first sight, one can see that submitting an offer is more difficult as several bidders can enter with different offers (like in this auction). The earlier discussed trade-off now exists not for 1, but for all 3 bids. According to the Erasmus University Rotterdam, it doesn’t have to be an optimal strategy to consider the same opportunity/profit trade-off for all 3 bids.

Leon Pulles said: “The most important conclusion of the research is that the consortium that can optimise their capital expenditures, operational expenditures and project financing the best, has the largest chance of winning the auction.”

So the researchers involved advise to take this into account when selecting partners for their consortium. The tender’s complexity makes it vital for participants to have combined knowledge about auction theory and valuation. Only when covering these aspects, a party can come with a winning offer, to earn the “wind license” and the accompanying subsidy.

Image: TenneT