Using Laboratory Experiments to Design Efficient Market Institutions: The case of wholesale electricity markets

This paper assesses the contribution of laboratory experiments to the economics of design applied to the electricity industry. The analysis is dedicated to wholesale markets, and reviews the results accumulated to date concerning both the general architecture of power markets and the very details of the market rules or institution, that is the auction rule. We argue that these experimental results contribute to a better understanding of the performances properties and implementation features of competitive market designs and that experimental economics has proven very useful to public authorities to inform the restructuring of electricity industry. It thus confirms the role of experimental economics as a complement to theoretical approaches in the design effort.Experimental economics; market design; design economics; electricity auction;

Auction versus Negotiation in Public Procurement: Looking for Empirical Evidence

The relative efficiency of auctions and negotiations is still a puzzle in the literature. While auctions are the prescribed procedures and the most used ones for public procurement, in the private sector, where buyers are free to choose their purchasing method, competitive tendering is far from being their preferred option (Bajari et al. 2009). In addition, recent empirical studies (Estache et al. 2009, Bajari et al. 2009) highlight some failures of auction procedures and identify conditions under which negotiation is more efficient. In particular, they show that auctions perform poorly when projects are complex. In this paper, our aim is to contribute to this debate by providing an empirical analysis of how awarding mechanisms are chosen in public procurement in France. To this end, we examine a comprehensive database of 76,188 observations corresponding to the entire set of public procurement work contracts awarded between 2005 and 2007 in the construction sector. We find empirical regularities regarding the choice of awarding procedures by public buyers. However, most of these regularities do not coincide with what the theoretical literature considers as transaction-cost minimizing behaviours. In particular, the size of the construction projects as well as the length of contracts do not appear as key determinants of the choice of awarding procedures, which translates into costly renegotiations.Auctions; Public Procurement, Contract Theories

Investment Incentives and Market Power: An Experimental Analysis

We examine investment incentives and market power in an experimental market. We characterize market power as the strategic interdependence of subjects' investment decisions and output decisions. The market is designed so that investment and output decisions can be jointly characterized as strategies within a game. A Nash-Cournot equilibrium of the game provides a way of characterizing how investment incentives and market power interact. Subjects could invest in two different production technologies and could produce output to serve as many as two different demand conditions. The technologies were analogous to "baseload" capacity and "peaking" capacity in wholesale electricity markets. The Nash-Cournot benchmark constituted a good indicator of subjects' output decisions in that output cycled around the Cournot benchmark. Thus, on average, consumers extracted the surplus available to them in the equilibrium. While we do not observe Edgeworth Cycles in prices or outputs, we do see them in the producer surplus series. Producers dissipated some of the surplus they could have extracted in the equilibrium by overinvesting in peaking capacity and underinvesting in baseload capacity. Inefficient investment diminished total system efficiency, but producers' investments in total production capacity tracked the Nash-Cournot benchmark. In contrast, monopoly explanations such as collusion do not characterize the data.capacity investment, Cournot, supply function equilibrium, Edgeworth Cycles, market power, electricity markets, investment incentives

Coordinating cross-border congestion management through auctions: An experimental approach to European solutions

International audienceCompetition among producers within an integrated electricity system is impeded by any limited transmission capacity there may be at its borders. Two alternative market mechanisms have recently been designed to organize the allocation of scarce transmission capacity at cross-border level: (i) the "implicit auction", already used in some countries, and (ii) the "coordinated explicit auction", proposed by the European Transmission System Operators (ETSO) but not implemented yet. The main advantage of the explicit auction is that it allows each country to keep its own power exchange running. In the European institutional context, this is seen as a factor of success of a market reform, although the explicit auction (not coordinated) is known to be less efficient than the implicit mechanism. The addition of a coordination dimension in the explicit auction is intended to solve problems of international flows. We use an experimental methodology to identify and compare in a laboratory setting the efficiency properties of these two market mechanisms, given a market structure similar to the existing one in continental Europe, i.e. a competitive oligopoly. Our main result highlights the inefficiency of the coordinated explicit auction compared to the performance of the implicit auction, measured in terms of both energy prices and transmission capacity allocation. We suggest that the poor performance of the coordinated explicit auction in the laboratory is due to the level of individual expectations about both energy and transmission prices that the mechanism demands. One solution to resolve this problem when the mechanism is implemented in the field would be to design an additional and secondary market for "used" transmission capacity

Transition énergétique, industries et marchés

La transition énergétique est devenue au cours des dernières années le nouveau mot d’ordre de la politique énergétique en Europe et dans la plupart des pays de l’OCDE sensibilisés aux risques liés aux changements climatiques. L’expérience allemande est ainsi présentée comme un exemple de politique publique volontariste au niveau national. Le but du programme politique de l’Energiewende est de gérer l’arrêt anticipé du nucléaire, suite à la catastrophe de Fukushima, par le développement conjoi..

Coordinating cross-border congestion management through auctions: An experimental approach to European solutions

Competition among producers within an integrated electricity system is impeded by any limited transmission capacity there may be at its borders. Two alternative market mechanisms have recently been designed to organize the allocation of scarce transmission capacity at cross-border level: (i) the "implicit auction", already used in some countries, and (ii) the "coordinated explicit auction", proposed by the European Transmission System Operators (ETSO) but not implemented yet. The main advantage of the explicit auction is that it allows each country to keep its own power exchange running. In the European institutional context, this is seen as a factor of success of a market reform, although the explicit auction (not coordinated) is known to be less efficient than the implicit mechanism. The addition of a coordination dimension in the explicit auction is intended to solve problems of international flows. We use an experimental methodology to identify and compare in a laboratory setting the efficiency properties of these two market mechanisms, given a market structure similar to the existing one in continental Europe, i.e. a competitive oligopoly. Our main result highlights the inefficiency of the coordinated explicit auction compared to the performance of the implicit auction, measured in terms of both energy prices and transmission capacity allocation. We suggest that the poor performance of the coordinated explicit auction in the laboratory is due to the level of individual expectations about both energy and transmission prices that the mechanism demands. One solution to resolve this problem when the mechanism is implemented in the field would be to design an additional and secondary market for "used" transmission capacity.auctions; congestion management; electricity markets; experimental economics

Using Laboratory Experiments to Design Efficient Market Institutions: The case of wholesale electricity markets

International audienceThis paper assesses the contribution of laboratory experiments to the economics of design applied to the electricity industry. The analysis is dedicated to wholesale markets, and reviews the results accumulated to date concerning both the general architecture of power markets and the very details of the market rules or institution, that is the auction rule. We argue that these experimental results contribute to a better understanding of the performances properties and implementation features of competitive market designs and that experimental economics has proven very useful to public authorities to inform the restructuring of electricity industry. It thus confirms the role of experimental economics as a complement to theoretical approaches in the design effort

Long-term investment incentives in peaking facilities in the electricity industry

Accessible en ligne : http://newsletter.epfl.ch/mir/index.php?module=Newspaper&func=view&np_id=26Energy-only markets do not produce the adequate incentives to invest in peaking facilities. Additional incentives to those inherent to markets have been imposed. Capacity mechanisms are distinguished between market-based and contract-based design

Choix Publics en Environnements Concurrentiels et Réglementés

This document presents a synthesis of my research since the defense of my PhD thesis entitled "Design of efficient market for the Deregulated Sectors: The Case of the wholesale electricity markets" in December 2001. The presentation of my work is built around two research programs, which relate to two types of complementary reforms, carried out in the late eighties, in many countries: the liberalization of infrastructure industries on the one hand, and the changes in the regulation of the public-private interactions on the other hand. In my work, I use the two traditional fields of public economics, namely the economic analysis of regulation on the one hand, and the economic analysis of the public contracts, on the other hand. I adopt a vision of the State as a regulator who relies on contracts of regulation or competitive mechanisms like auctions, to intervene and regulate the economic activity. I mobilize the transaction cost theory and the new institutional economics applied to the regulation (Spiller, 2009, 2011) on the one hand, and the incentive theory applied to the regulation on the other hand (Baron, Myerson 1982; Laffont, Tirole 1993), to study the efficiency properties of contracts and markets. Lastly, I use the recent developments of auction theory and mechanism design to understand the impact of market institutions (in particular auctions) on efficiency. I use empirical approaches, studying various sectors in which reforms have been conducted to increase efficiency: the electric sector, the rare diseases channel, energy efficiency activity, public work procurement. My work relates to the competitive reforms, when it is a question of introducing competition where it did not exist, or to the regulatory reform which aim at defining and enforcing public-private interactions.Ce mémoire présente une synthèse des travaux de recherche que j'ai menés sur une dizaine d'années, depuis la soutenance de ma thèse de Doctorat " Conception de Marchés Efficaces pour les Secteurs Déréglementés : Le Cas des Marchés de Gros d'Electricité " en décembre 2001. L'exposé de mes travaux est construit autour de deux programmes de recherche, qui portent sur deux types de réformes complémentaires menées, depuis les années quatre-vingts, dans de nombreux pays: les réformes de libéralisation des industries d'infrastructure d'une part, et les évolutions réglementaires qui encadrent les interactions entre le secteur public et le secteur privé d'autre part. Dans mes travaux, j'emprunte deux directions traditionnelles de l'économie publique, à savoir l'analyse économique de la réglementation d'une part, et l'analyse économique des contrats publics d'autre part. J'adopte une vision d'un Etat régulateur qui s'appuie sur des contrats de régulation ou des mécanismes concurrentiels comme les enchères, pour intervenir et réguler l'activité économique. Je mobilise la théorie des coûts de transaction et la théorie néo-institutionnelle appliquée à la régulation d'une part, et la théorie des incitations appliquée à la régulation d'autre part, pour étudier les propriétés d'efficacité des mécanismes contractuels et des marchés. Enfin, je mobilise les développements récents de théorie des enchères et de l'économie du design appliqués aux secteurs que j'étudie pour comprendre l'impact des institutions de marché (notamment les enchères) sur l'efficacité des échanges. Mes travaux sont appliqués, et portent sur différents secteurs qui ont pour point commun d'être l'objet de réformes censées améliorer. Mes travaux concernent les réformes concurrentielles, quand il s'agit d'introduire la concurrence là où elle n'existait pas , ou les réformes réglementaires qui visent à modifier et encadrer les interactions public-privé. J'étudie plus particulièrement la libéralisation du secteur électrique. Dans ce programme de recherche, j'ai choisi d'étudier deux mécanismes qui participent à créer les conditions d'une concurrence effective à un niveau particulier de la filière électrique. Il s'agit d'une part des méthodes de gestion des congestions aux interconnexions transfrontalières - dispositifs cruciaux dans la perspective de la création d'un marché unique européen, et pour la sécurité d'approvisionnement à court terme - et d'autre part des mécanismes d'incitation aux investissements pour les capacités de pointe, qui viennent compléter les signaux " naturels " que sont les prix de l'électricité sur les marchés de gros, pour assurer la sécurité d'approvisionnement de long terme. Concernant le deuxième programme de recherche, mes travaux portent plus particulièrement sur deux types d'arrangements utilisés pour la commande publique qui ont fait l'objet de nouveaux textes réglementaires : les marchés publics dont les conditions d'utilisation sont définies dans les directives européennes 2004/18/CE et 2004/17/CE transposées en France dans le Nouveau Code des Marchés Publics de 2006 et les contrats de partenariat public-privé instaurés par le législateur en 2004 (ordonnance 2004-559 du 17 juin 2004 modifiée en 2008) ce qui en fait l'une des dernières formes de contrat public introduite en France

Les PPP comme outils de financement des investissements publics

National audienc