A REAL OPTIONS APPROACH FOR RENEWABLE AUCTIONS

The model by Wozabal et al. (2021) combines auction theory and real options theory to represent renewable energy auctions, where the right to build subsidized renewable projects is valued as a European put option. In their framework, bidders are heterogeneous and hold private information on their initial costs and volatility signals. Two bidding strategies are considered: a net present cost (NPC) approach, based on net present value, and an option-based cost (OBC) approach, based on real option valuation. This thesis builds on that model by introducing one key difference: investment opportunities are modeled as American put options. This extension captures the flexibility of investment timing within a predefined maturity, providing a richer representation of bidders’ strategic behavior in renewable energy auctions for Contracts for Differences (CfDs). Using Least squares Monte Carlo (LSMC) method introduced by Longstaff & Schwartz (2001), we evaluate investment projects as American put options, capturing the option to defer under cost uncertainty to compute the OBC valuations. We show that higher cost projects exhibit higher exercise thresholds and delayed exercise, while exercise times tend to cluster near maturity. The model is applied to simulate outcomes of the German onshore wind auction (ONWA17) and compared to real auction outcomes. Incorporating American-style option valuation provides a more realistic understanding of bidder behavior and highlights the value of early exercise flexibility in project realization decisions.