Optimal bidding for a bundle of power transmission infrastructure works

Abstract

Motivated by recent reforms in Chile’s electricity market, where bundled auctions are used to attract participation and accelerate investment, we develop a theoretical model that explains the strategic role of private financing conditions in such settings. We put forward an optimal bidding mechanism for a bundle of power transmission infrastructure works. Specifically, the regulator auctions two works altogether: one is to be developed and operated by the winning bidder, while the other is an owner-operated and financed expansion of an existing work. Participants bid jointly for both contracts, and the package is awarded based on the lowest total bid. The costs are divided into a common developing part for all participants and a private part related to financing. The optimal bidder offers the expected value of the costs, adjusted for the cost advantage over the second lowest bidder. This approach efficiently allocates the works to the firm with the lowest combined costs. However, rents persist due to the informational and cost advantage in financing. When a bidder expects higher costs, it requests a higher payment, which reduces its chances of winning the bid.