Is small always beautiful? Analyzing the efficiency effects of size heterogeneity in renewable electricity auctions

Abstract

The size of bidders has been the focus of some research in the empirical literature in renewable electricity auctions, mostly related to the (negative) impact of auctions and auction design elements on the participation and award of small bidders. The main result of this literature is that small actors are discouraged from participating and being awarded in the auction and that this is a detrimental outcome of auctions. However, the impact of small bidders on the efficiency of the auction has not received a comparable degree of attention. The aim of this paper is to contribute to this literature with an analysis of the efficiency effects of bidders with different sizes in renewable electricity auctions. Our results show that a greater diversity of bidders’ sizes increases the probability that the auction will not be efficient. In other words, promoting small actors with respect to large ones comes at a cost in terms of a lower allocative efficiency i.e., that the lowest-cost bidders will not be awarded. Although some governments have a goal of promoting the participation of small actors in auctions, our findings suggest that the reason for promoting actor diversity is not in the allocative efficiency of the auction, but must lie elsewhere i.e., a greater competition, mitigation of the risk of collusion, social acceptability or decentralization of renewable energy production.