Competition in Electricity Spot Markets: Economic Theory and International Experience

auctions, electricity markets

Modeling Electricity Auctions

The recent debates over discriminatory versus uniform-price auctions in the UK and elsewhere have revealed an incomplete understanding of the limitations of some popular auction models when applied to real-world electricity markets. This has led certain regulatory authorities to prefer discriminatory auctions on the basis of reasoning from models which are not directly applicable to any existing electricity market. Vickrey auctions, although often recommended by economists, have also been ignored in these debates. This article describes the approach which we believe should be taken to analyzing these issues

Designing Electricity Auctions

Motivated by the new auction format introduced in the England andWales electric- ity market, as well as the recent debate in California, we characterize bidding behavior and market outcomes in uniform and discriminatory electricity auctions. We ¯nd that uniform auctions result in higher average prices than discriminatory auctions, but the ranking in terms of productive e±ciency is ambiguous. The comparative e®ects of other market design features, such as the number of steps in suppliers' bid functions, the duration of bids and the elasticity of demand are also analysed. We also consider the relationship between market structure and market performance in the two auction formats. Finally, we clarify some methodological issues in the analysis of electricity auctions. In particular, we show that analogies with continuous share auctions are misplaced so long as ¯rms are restricted to a ¯nite number of bids

Designing Electricity Auctions

Motivated by the new auction format introduced in the England and Wales electricity market, as well as the recent debate in California, we characterize bidding behavior and market outcomes in uniform and discriminatory electricity auctions. We find that uniform auctions result in higher average prices than discriminatory auctions, but the ranking in terms of productive efficiency is ambiguous. The comparative effects of other market design features, such as the number of steps in suppliers' bid functions, the duration of bids and the elasticity of demand are also analysed. We also consider the relationship between market structure and market performance in the two auction formats. Finally, we clarify some methodological issues in the analysis of electricity auctions. In particular, we show that analogies with continuous share auctions are misplaced so long as firms are restricted to a finite number of bids.Market design, electricity, multi-unit auctions, regulatory reform

Modeling Electricity Auctions

The recent debates over discriminatory versus uniform-price auctions in the UK and elsewhere have revealed an incomplete understanding of the limitations of some popular auction models when applied to real-world electricity markets. This has led certain regulatory authorities to prefer discriminatory auctions on the basis of reasoning from models which are not directly applicable to any existing electricity market. Vickrey auctions, although often recommended by economists, have also been ignored in these debates. This article describes the approach which we believe should be taken to analyzing these issues.electricity markets, auctions, Vickrey auctions

Price volatility and risk exposure: on the interaction of quota and product markets

We consider an industry with firms that produce a final good emitting pollution to different degree as a side effect. Pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset, i.e. before the quota market is opened. We study how volatility in quota price affects firm behaviour, taking into account the impact of quota price on final-good price. The impact on the individual firm differs depending on how polluting it is - whether it is `clean' or `dirty'- and whether it has been allocated quotas at the outset. In the absence of long-term or forward contracting, the optimal initial quota allocation turns out to resemble a grandfathering regime: clean firms are allocated no quotas - dirty firms are allocated quotas for a part of their emissions.With forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour.regulation, effluent taxes, tradable quotas, uncertainty, risk aversion, environmental management

THE NORDIC MARKET: SIGNS OF STRESS?

The supply shock that hit the Nordic electricity market in 2002-2003 put the market to a severe test. A sharp reduction in inflow to hydro reservoirs during the normally wet months of late autumn pushed electricity prices to unprecedented levels. We take this event as the starting point for analysing some potential weaknesses of the Nordic market. We conclude that fears regarding supply security and adequacy are likely to be unfounded. Nevertheless, as inherited over-capacity is eroded, and new market-based environmental regulation takes effect, tighter market conditions are to be expected. It is then crucial that retail markets are fully developed so as to allow consumers to adequately protect themselves from occurrences of price spikes.Production; Pricing; and Market Structure; Size Distribution of Firms; Firm Performance: Size; Diversification; and Scope; Retail and Wholesale Trade; e-Commerce; Air Transportation; Organizational Behavior; Transaction Costs; Property Rights; Oligopoly and Other Forms of Market Imperfection.

Investment incentives and auction design in electricity markets

Motivated by the regulatory debate in electricity markets, we seek to understand how market design affects market performance through its impact on investment incentives. For this purpose, we study a two-stage game in which firms choose their capacities under demand uncertainty prior to bidding into the spot market. We analyse a number of different market design elements, including (i) two commonly used auction formats, the uniform-price and discriminatory auctions, (ii) price-caps and (iii) bid duration. We find that, although the discriminatory auction tends to lower prices, this does not imply that investment incentives at the margin are poorer; indeed, under reasonable assumptions on the shape of the demand distribution, the discriminatory auction induces (weakly) stronger investment incentives than the uniform-price format

Prices vs. quantities: the case of risk averse agents

We explore the efficacy of price and quantity controls as environmental policy instruments in a stochastic setting in which agents are risk averse. We demonstrate that the assumption of risk aversion may improve the performance of a tax relative to that of a system of tradable quotas, and that restricting quota trade may enhance e.ciency even though risk aversion in itself limits volumes of trade. The government may be able to improve the performance of a tradable quota system by judicious choice of distribution and amount of initial quotas and by trading pro-actively in the quota market

Designing Electricity Auctions

Motivated by the new auction format in the England and Wales electricity market, as well as the recent debate in California, we characterize bidding behavior and market outcomes in uniform and discriminatory electricity auctions. Uniform auctions result in higher average prices than discriminatory auctions, but the ranking in terms of productive efficiency is ambiguous. The comparative effects of other market design features, such as the number of steps in suppliers’ bid functions, the duration of bids, and the elasticity of demand are analyzed. We also consider the relationship between market structure and market performance in the two auction formats.Publicad