Combinatorial Auctions for Renewable Energy — Potentials and Challenges

Combinatorial auctions, which allow bidders to bid not only on individual items but also on packages of items and to express complementary and substitute relationships between items, have rarely been used for competitive allocation of renewable energy (RE) support. In other settings, combinatorial auctions are widely used because they can increase efficiency and take substitution relationships into account. We argue that complementary and substitute relationships between RE projects are prevalent. Combinatorial auctions allow developers to bid according to their calculations and offer efficiency potential for RE expansion. We point out how this potential depends on the area of application within the RE environment, and discuss implications for the design of combinatorial auctions. When specific sites are being auctioned, typically for offshore wind, or projects are similar and well assessable for the auctioneer, the design of a combinatorial auction is straightforward. Additional design questions arise when the auction selects among individual projects, as is typical for onshore RE support. Seemingly minor adaptations of standard combinatorial auctions may incentivize distorted bids, which can lead to inefficient outcomes and strategic non-realization of projects. We provide policy implications and practical guidance for policymakers to cater combinatorial auctions to the RE context.