CfD Auctions: Review and Recommendations

Copenhagen Economics assisted UK energy regulator BEIS to stress-test the auction regulations due to apply in the CfD AR3 and AR4 auction, identifying potential loopholes and risks, and suggesting potential mitigations. Furthermore, in the lead up to AR3, we provided BEIS with a detailed report outlining broader auction design considerations for future CfD allocation rounds.

Every second year, the UK Department for Business, Energy & Industrial Strategy (BEIS) awards new Contracts for Differences (CfDs) to low-carbon electricity generators. BEIS requested our assistance in relation to a review of the draft auction regulations due to apply in the 2019 CfD AR3 and the 2021 CfD AR4 auctions, with a focus on identifying potential gaming opportunities and assessing the likelihood and potential impact of risks.

We were, in the lead-up to AR3, also requested to explore potential changes to the auction design to be deployed in 2021 and onwards to further advance BEIS’ objectives. We drew upon our expertise in auction theory and practice to conduct a full investigation of the CfD auction design, from both a theoretical perspective, mapping out bidding strategy considerations, as well as an applied perspective, building a simulation tool that could stress-test various auction parameters.

Our findings were summarised in concise reports for BEIS that contributed to internal decision-making leading up to AR3 and AR4. We suggested concrete rule tweaks to address potential risks.

With our assistance, BEIS obtained a thorough understanding of the potential gaming opportunities, the likelihood and potential impact of risks for the CfD auctions. BEIS also gained valuable input towards optimising auction design in future allocation rounds.