Potential and Goal Conflicts in Reverse Auction Design for Bioenergy Projects
Bioenergy with carbon capture and storage (BECCS) is emerging as a key technology to provide baseload electricity, heat, and biofuels while also enabling atmospheric carbon dioxide removal (CDR). Sweden is at the forefront of efforts to scale up BECCS, introducing a €3.6 billion reverse auction scheme to facilitate market entry for BECCS operators. But designing effective and efficient reverse auctions for BECCS involves navigating complex trade-offs.
Auction Design Considerations
Reverse auctions are an attractive policy mechanism for incentivizing BECCS, as they can help reveal the true costs of this nascent technology. By inviting prospective BECCS operators to compete for support, reverse auctions can identify the marginal cost of deploying BECCS. This is particularly valuable given regulators’ limited experience with the technology. However, BECCS presents unique challenges compared to deploying renewable energy or ecosystem services through auction schemes.
Auction Participants
A major concern is attracting sufficient participation in BECCS auctions. The technical potential for BECCS is concentrated in relatively few large point sources of biogenic CO2, such as pulp and paper mills or combined heat and power plants. Many of these facilities face significant economic constraints, such as limited access to excess heat or CO2 transport infrastructure, which could limit their ability or willingness to participate.
Prospective BECCS operators also express fears of the “winner’s curse”—bidding too low and being unable to profitably deliver on a contract. This risk is heightened by the immaturity of the technology and uncertain learning curves. Smaller players with less developed BECCS plans may be more eager to participate, but they also tend to have higher cost estimates and less capacity to conduct rigorous feasibility studies.
Balancing entry criteria to exclude unserious bids without overly restricting participation is a delicate task. Policymakers may need to couple auctions with capacity-building support, such as grants for advanced feasibility assessments, to reduce investment uncertainties and encourage broader bidder engagement.
Bidding Strategies
Auction design preferences among prospective BECCS operators and government representatives are highly diverse, with little consensus on issues like bid procedures, pricing rules, and contract allocation. This reflects a lack of clarity on the primary objectives of the auction scheme—whether to demonstrate technology, reveal costs, or achieve the lowest-cost CDR.
Some favor discriminatory “pay-as-bid” auctions to maximize cost-efficiency, while others argue for uniform pricing to better incentivize truthful cost revelation. Multifaceted bid evaluation criteria, such as bonuses for technological innovation or regional clustering, could also be considered. But past experience suggests these can reduce auction efficiency.
Determining the optimal allocation of contracts at the margin of the auction cap is another challenge. BECCS exhibits significant economies of scale, making it difficult to linearly scale down bids. This could force the auctioneer to make difficult trade-offs between accepting higher-cost bids to meet a volume target or accepting lower-cost bids that exceed the target.
Auction Outcome Objectives
Clarity on the overarching objectives of the BECCS auctions is crucial. If the priority is technology demonstration, more permissive entry criteria and flexibility on contract allocation may be warranted. But if cost-effectiveness is the main goal, the auction design should focus on maximizing competition and revealing true marginal costs.
Potential Conflicts in Auction Design
Accommodating the diverse preferences of stakeholders—BECCS operators, policymakers, regulators—can lead to tensions and trade-offs in auction design.
Stakeholder Objectives
BECCS operators are primarily concerned with managing investment risks and securing long-term revenue certainty. They tend to favor flexible compliance mechanisms, longer contract durations, and integration with voluntary carbon markets. In contrast, government representatives prioritize cost-effectiveness, environmental integrity, and alignment with national climate targets.
Resource Allocation Tradeoffs
Balancing the auctioneer’s demand for BECCS deployment against operators’ fears of the winner’s curse is a delicate act. Overly strict entry criteria or volume caps could limit participation and undermine competition, while more permissive design risks non-performance and inefficiency.
Sustainability Considerations
The relationship between BECCS auctions and emerging voluntary carbon markets also poses challenges. BECCS operators may seek to monetize the carbon removal attributes of their projects through carbon credit sales. But integrating auctions with these markets in a way that preserves environmental integrity requires carefully managing issues of double counting and corresponding adjustments.
Goal Alignment in Auction Design
Navigating these conflicts requires aligning the auction design with the overarching policy objectives. A clear statement of priorities—whether technology demonstration, cost revelation, or emissions reduction—can help guide the auction parameters.
Incentive Structures
Incentive structures should balance the need for revenue certainty to attract BECCS investment with the auctioneer’s desire for cost-effectiveness. Flexible contract structures, such as allowing temporary deficits to be offset by banked surpluses, may help optimize this balance.
Performance Metrics
Performance metrics and compliance mechanisms should be stringent enough to ensure effective delivery of BECCS, but not so onerous as to deter participation. A balanced approach, potentially drawing on international experiences with renewable energy or ecosystem service auctions, is key.
Monitoring and Evaluation
Robust monitoring and evaluation frameworks will be essential to assess the auction scheme’s performance and make iterative improvements. This should include tracking not just cost and capacity metrics, but also the environmental and social impacts of BECCS deployment.
Auction Dynamics and Complexity
The unique characteristics of BECCS introduce additional complexities that can affect auction dynamics and outcomes.
Market Characteristics
Unlike renewable electricity, BECCS does not produce a readily tradable commodity. This makes it challenging to structure auctions around a predictable market price, as is common for renewable energy. The lack of an established carbon removal market also creates uncertainties around revenue streams.
Informational Asymmetries
Regulators face significant informational disadvantages compared to prospective BECCS operators, who have detailed knowledge of site-specific technical and economic constraints. Reverse auctions can help address this, but only if they attract sufficient participation.
Behavioral Factors
The investment risks and technological uncertainties associated with BECCS may also influence bidding behavior. Prospective operators may adopt overly cautious strategies, further limiting competition, or alternatively, place overly optimistic bids that risk the winner’s curse.
As Sweden and other European countries move forward with BECCS incentive schemes, addressing these complexities will be critical to designing effective and efficient reverse auctions. Balancing the diverse objectives of stakeholders, safeguarding environmental integrity, and fostering broad participation will be key to unlocking the potential of BECCS to support Europe’s clean energy transition.
