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Greve, T. and Pollitt, M.

Determining the optimal length of regulatory guarantee: A Length-of-Contract Auction

CWPE1348

Abstract: One of the biggest challenges in the area of infrastructure investment is the provision of funding to finance activities. This paper presents an auction design which can reduce the financing cost of infrastructure investments by allowing the length of the regulatory funding period to be determined via an auction. The auction allows bidders to submit bids against a payment for periods of varying length. Thus instead of, for example, a fixed 20-year contract period, some bidders might want to bid for financing over a longer period, say 25 or 30 years. This can be desirable in terms of securing more favourable terms in the financial markets. Our auction design can secure efficiency and lower financing costs. Our auction is motivated by the auctions currently being undertaken by the UK energy regulator (Ofgem) for financing offshore transmission assets. Although the auction was designed with electricity transmission in mind, the auction could be used in other areas of infrastructure investments

Keywords: Auctions, Contracts, Investments, Regulation

JEL Codes: D44 D86 E43

Author links: Michael Pollitt  

PDF: http://www econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1348.pdf

EPRG Paper Link: 1325

Open Access Link: https://doi.org/10.17863/CAM.5718


Published Version of Paper: Determining the optimal length of regulatory guarantee: a length-of-contract auction, Greve, T., Pollitt, M., The Economic Journal (2016)

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