auction to enter the auction: considerable (sunk) bid ... · •can be up to 10% of total project...
TRANSCRIPT
![Page 1: auction To enter the auction: considerable (sunk) bid ... · •can be up to 10% of total project cost! •Bid preparation costs is a well-known phenomena –Recent case: British](https://reader031.vdocuments.us/reader031/viewer/2022041411/5e1926cdba8fc8619054eeda/html5/thumbnails/1.jpg)
Silvester van Koten
Jan Vavra
University of Economics, Prague
(kie.vse.cz)
Modeling the wind auctions
as a participation game
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Consider the following case
• To enter to an industry:
– need to win a license in an
auction
– To enter the auction: considerable
(sunk) bid preparation costs
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•Renewables were supported by
feed-in tariffs in many EU
countries
–big drawbacks (costly and hard
to control)
•New system by auctioning the
support in a reversed auction
–Limited number of “support
units”
–Win support units by bidding
the price you would like to
have guaranteed for your
project.
![Page 4: auction To enter the auction: considerable (sunk) bid ... · •can be up to 10% of total project cost! •Bid preparation costs is a well-known phenomena –Recent case: British](https://reader031.vdocuments.us/reader031/viewer/2022041411/5e1926cdba8fc8619054eeda/html5/thumbnails/4.jpg)
• Focus on German auctions for support to onshore wind (EEG 2014)
– Bid eligibility requirement
•permits necessary for the realization of the project.
•form of (sunk) bid preparation costs
•can be up to 10% of total project cost!
• Bid preparation costs is a well-known phenomena
– Recent case: British printing firm De La Rue
•lost bid for printing order of new UK passports
•profit warning, due to the large bid preparation costs.
•£4m for contract of £490m -> 0.8%!
• What are the effects of the much
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• n actual bidders entered (common
knowledge).
• Other bidders receive outside
option OO.
• Actual bidders bid in an reverse
UPA auction.
Stage 1
Stage 2
• The Auctioneer announces an auction with
U units and CAP price.
• N potential bidders decide simultaneously
whether to enter and pay δLFC.
• Mixed strategy: each potential bidder
enters with probability q.
• The model - setup
![Page 6: auction To enter the auction: considerable (sunk) bid ... · •can be up to 10% of total project cost! •Bid preparation costs is a well-known phenomena –Recent case: British](https://reader031.vdocuments.us/reader031/viewer/2022041411/5e1926cdba8fc8619054eeda/html5/thumbnails/6.jpg)
• n bidder entered
• If
– n ≤ U : bid
– n > U : bid
Stage 1
Stage 2
CAP
(1 )MC LFC L LFC
H CAP MC LFC
* :q Pr[ | ] Pr[ | ]H Ln U q n U q OO
• There are N potential bidders
• Bidder enters with probability q
• The model - solving
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Pr[ | ] Pr[ | ]H Ln U q n U q OO
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Simulation parameters
• N = 30 (potential bidders)
• U = 1,...,25 (units on sale,
varies)
• MC = 5
• CAP = 100
• δ = 10%
• average of 50 000 draws
FIXED DISTRIBUTION
• LFC = 40 LFC iud [30,50]
The simulation
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Fixed costs identical CAP = 100
Equilibrium bid + lcost
of shortageEquilibrium bid
Lcost (UPA without)
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Fixed costs iud [30,50]
CAP = 100
Equilibrium bid + lcost
of shortageEquilibrium bid
Lcost (UPA without)
![Page 11: auction To enter the auction: considerable (sunk) bid ... · •can be up to 10% of total project cost! •Bid preparation costs is a well-known phenomena –Recent case: British](https://reader031.vdocuments.us/reader031/viewer/2022041411/5e1926cdba8fc8619054eeda/html5/thumbnails/11.jpg)
CAP = 100
Fixed costs identical
Probability q
Fixed costs iud
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CAP = 100
Units in excess rel. to units used
Fixed costs
identicalFixed costs iud
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• Decreasing CAP may help?
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Fixed costs identical CAP = 100
Equilibrium bid + lcost
of shortageEquilibrium bid
Lcost (UPA without)
Fixed costs
identical
CAP = 60
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• Decreasing CAP may help?
– Lowers cost
– Increases cost of non-build
capacity due to potential shortage
of entry
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• Pre-investment costs only 1%
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Fixed costs
identical
Fixed costs iud
[30,50]
δ = 0.01
Equilibrium bid + lcost
of shortageEquilibrium bid
Lcost (UPA without)
Probability q
![Page 18: auction To enter the auction: considerable (sunk) bid ... · •can be up to 10% of total project cost! •Bid preparation costs is a well-known phenomena –Recent case: British](https://reader031.vdocuments.us/reader031/viewer/2022041411/5e1926cdba8fc8619054eeda/html5/thumbnails/18.jpg)
•Conclusion
–Theory predicts that sunk pre-
investment in an auction:
•Creates a stochastic process of entry
•Excess entry -> increases auction price,
wasted sunk costs
•Shortage of entry -> unimplemented projects
•This results to higher bids then the same
auction without pre-investment
– Lowering the CAP price
•Reduces excess entry
•Increases shortage of entry
–Lowering the pre-investment
•Lowers excess entry and shortage of entry
•Make auction closer to a ideal case (solar
vs. wind)
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![Page 20: auction To enter the auction: considerable (sunk) bid ... · •can be up to 10% of total project cost! •Bid preparation costs is a well-known phenomena –Recent case: British](https://reader031.vdocuments.us/reader031/viewer/2022041411/5e1926cdba8fc8619054eeda/html5/thumbnails/20.jpg)
• If anybody wants to know:
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• Assumptions
– One-shot game
– UPA instead of DA
– Single-unit demand
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