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: https://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
