Navigating auctions: Outperform using a four-step Digital approach
Auctions are becoming increasingly familiar mechanisms in the energy system.
Whether it is awarding renewable support contracts, allocating leases for offshore development, procuring system services or capacity contracts, or determining payments for coal plant closures, developers and service providers are confronted with the challenge to navigate through auction processes that are both complex and risky.
Participants in an auction are often trying to construct their bidding strategy in the face of multiple uncertainties around future market and policy conditions and the positions of potential competitors. However, good preparation ahead of the auction can help energy companies increase their chances of a successful outcome. Following four simple steps can give companies more confidence in their strategy when entering any auction situation.
1. Understand the auction design
Auctions can differ across several dimensions:
- single or multi-unit
- ascending or descending
- pay-as-bid or pay-as-cleared
- single or multi-round
- sealed or open bid
Auction theory can provide insights into how the design of the auction influences bidders’ behaviour in the auction.
2. Know the auction rules
While general auction design provides some insights, the specific rules of the auction can greatly influence your strategy. Participation and bidding constraints, together with clearing rules, will vary. Ask yourself simple questions such as:
- ‘How many bids can I submit?’
- ‘Can I change my bid price/quantity?’
- ‘What information will be made available during the auction (or between bidding rounds)?’
Scrutinising the auction rules to find potential advantages to give you a competitive edge can become the difference between success and failure.
3. Analyse the competition
The more you know about your competitors, the better. Ask yourself the following to understand your competitors’ behaviour and strategy:
- Who is expected to participate?
- What is their overall business strategy?
- Which of their assets/projects will be eligible to participate?
- What are their strategic objectives?
- Have they participated in previous auctions?
- What do I know about their costs and expectations of the future market?
This competitor analysis will help define the boundaries of your bidding strategy.
4. Test your strategies
Without this final step, any bidding strategy will be incomplete as it is unlikely to explore all possibilities. Automated Monte Carlo simulations can represent the distribution of bidding behaviours across a range of uncertainties such as:
- project costs;
- future market revenue expectations;
- required returns; or
- bidding strategies
in order to identify possible ‘dominant strategies’ and improve the success of your bid. Alternatively, using Real-Time Wargames, will not just familiarise you with the auction mechanics, it can also identify competitor strategies you hadn’t considered.
How can AFRY help you preparing for auctions?
AFRY has worked alongside many companies to make their auction participation simpler and more successful. From Mexico and Greece to the Netherlands, Portugal, Ireland and Great Britain, AFRY teams have supported clients through the four steps and beyond. We can work with you during the auction itself, providing bid management services and updating strategic positions during live auctions.
- our expertise in auction design and auction theory;
- detailed insights on market players and technologies through the in-house databases feeding our market-leading AIM reports; and
- our in-house auction platform, based on digital solutions and AI;
we are uniquely placed to assist in developing your bidding strategies for future tenders such as the GB fourth CfD allocation round, further coal exit auctions in Germany or potential US Bureau of Offshore Energy Management (BOEM) offshore lease auctions.
Our auction platform is a cloud-based solution that can be customised to recreate any auction rules and represent any set of potential market participants. The platform allows clients to explore the constructed competitor information, study and understand the auction rules and test different bidding strategies.
Additionally, the tool has the ability to run virtual wargames, where members of the bidding team can participate as if they were key competitors. This allows them to explore potential strategies, develop an understanding of competitors and gain unparalleled bidding experience. The auction can also be supplemented with “bots” to represent some competitors.