Oleksandra Gumeniuk – Director of the European-Ukrainian Energy Agency on the types of auctions and tenders that can be used to form the Ukrainian auction system for RES sector.
By the definition of economists, McAfee Dinesh Satam and McMillan Dinesh in their distinguished work, “Auctions and Bidding,” which was published in the Journal of the Economic Literature in 1987 (Source), in the classical sense, there are four main types of auctions:
1. English auction, known as oral open auction at rising prices. Participants openly submit applications one by one, with each subsequent application should be higher than the previous one. If the seller has set the minimum selling price in advance (the price of the “reserve”), and the final rate does not reach this price, the product remains unsold.
2. Dutch auction is the reverse of the English auction model, known as a downward auction, where the auctioneer starts at a high price, which decreases until the participant wants to accept the price or until the seller’s backup price is satisfied.
3. First-price sealed bid or blind auction, where all participants simultaneously submit sealed offers, so that no participant knows the bet of any other participant and wins the biggest offer. This type of auction is different from the English auction, that participants can submit only one offer, and do not see the prices of other participants when the English model is all open and it is possible to adjust their offers. Actually sealed auctions at the first price are procurement tenders by companies and organizations, in particular for government institutions.
4. Vickrey Auction, also known as the second-price sealed bid auction, with a sealed price identical to the auction of the sealed first price, except that the winning bidder pays the second highest bid instead of his own.
The success of the auction and the final price at which the sale transaction will take place depends on many factors and is based on analysis and guesses: analysis of potential auction participants (their number, their capabilities and appetites), market risk analysis, stability and responsibility of the auctioneer, and whether it guarantees after the completion of the auction to fulfill its part of the obligations. These factors influence the assumptions of the bidders, their guesses and confidence, and, accordingly, all this affects their behavior in bidding.
In the mentioned article above, the last section is the advice for a monopolist (under the monopoly here is meant the sole seller of a unique product, which organizes an auction, since it alone decides on the organization of an auction and an acceptable price for a product / service, for which market participants are struggling). The tips are for how to make the most effective auction and get the best price for the auction organizer.
First advice: trust. Make bidders believe that the pricing strategy will not be changed and that after the auction is completed, all obligations will be met by the auction organizer. Assuming such obligations and fixing them in the relevant documents will eliminate additional worries and assumptions of the risks of bidder.
Second advice: type of auction. What type of auction you choose. To answer this question, it is necessary to determine whether bidders are willing to “pay” higher prices for saving themselves from risks. Also, the auction organizer must know the bidder’s guess about the real price. If the bidder no longer wants to bear the risk, the auction organizer must introduce a reserve price (half the maximum possible estimate).
If a bidder wants to avoid risk, then the First-sealed bidder price will be more effective than the English model. The main idea in the article is that in order to increase the activity of bidders you can impose an additional fee for too weak offers and that you will subsidize bidders that have strong bids but are not competitive enough to win a bid. It is necessary to keep secret about bidder, as how many other bidders with whom he is competing.
Third advice: royalty. If the auction organizer can monitor the subsequent use of the unit purchased by the winner, then you can safely use the royalty scheme. By the way, this may be an additional deterrent mechanism for speculation acquired by auction projects RES. The royalty system involves the winner of an auction of continuous payments based on the cost of use or resale: royalties encourage the auction to be more competitive. It is possible to predict that in case of resale after the auction of the won power, the seller pays a certain percentage of the cost of the contract to the auction organizer.
Fourth advice: buyers cartel. If the monopoly power of the auctioneer is eroded by the formation of buyer’s cartel (the elegal cartel of bidders is not the same as group buyers), you can restore some of your profits by increasing of the reserve price. The reserve price is the minimum bid that the bidder accepts as a winning bidder. The reserve price prevents the auction winner from bidding, which offers an inappropriate price.
In order to bid and receive the lowest price per megawatt of electricity produced from renewable sources, it is also possible to use elements of the Spanish electricity market, where the tenders are as follows:
The administrator sets the starting price, and sellers apply for the amount they are willing to sell at that price. The total amount of these applications (proposed energy) exceeds the energy sold at the auction (intended for purchase). At this stage, a series of rounds begins at which the administrator initially lowers the price, and then sellers adjust their rates down (reducing the amount of energy they offer). At the end of each round, the Administrator compares the proposed energy with that intended for sale, and if there is still a surplus, a new round is proposed. (Source)
This auction is held every three months, and its price is used to set the tariff, which will be paid by consumers. At this auction, buyers are traffickers in the worst case, and sellers are financial institutions, national or international companies involved in the production or trading of electricity.
A few weeks before the auction, traders give their forecasts of consumption for the next quarter. The information is analyzed and it is planned how much energy will be purchased at the auction.
The auction process lasts for several hours, ends when there is no additional offer. At this time, the Administrator determines the auction price during the last round, and each seller is obliged to sell the amount they offered during the last round.
According to the report of the Council of the European Energy Regulator, by the end of 2017, 13 EU countries (Belgium, Denmark, Spain and the United Kingdom, France, Germany, Greece, Italy, Malta, the Netherlands, Lithuania, Portugal, Poland) introduced bidding procedures for one or more RES technologies. In addition, by the end of 2017, only 5 countries (Croatia, Finland, Hungary, Luxembourg, Estonia) have adopted or were about to adopt the relevant legislation, paved the way for tenders for RES. (Source)
Summarizing of all above, it seems like Dutch auction with elements of First Price Sealed Bid can be used for the Ukrainian market, but also for several auction rounds organization.
The article is a personal opinion of the author and is not the EUEA position.