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

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  • Céline Jullien

    ()
    (Grenoble Ecole de Management, 12 rue Pierre Sémard, 38003 Grenoble, Cedex 01, France)

  • Virginie Pignon

    ()
    (Electricité de France)

  • Stéphane Robin

    ()
    (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

  • Carine Staropoli

    ()
    (University Panthéon Sorbonne, Centre d’Economie de la Sorbonne, 106 boulevard de l’Hôpital Bureau 514, 75013 Paris, France)

Abstract

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.

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Bibliographic Info

Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 1121.

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Date of creation: 2011
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Handle: RePEc:gat:wpaper:1121

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Keywords: auctions; congestion management; electricity markets; experimental economics;

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  1. Smith, Vernon L., 2002. "Constructivist and Ecological Rationality in Economics," Nobel Prize in Economics documents, Nobel Prize Committee 2002-7, Nobel Prize Committee.
  2. Noussair, Charles & Plott, Charles & Riezman, Raymond., . "An Experimental Investigation of the Patterns of International Trade," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 799, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Ehrenmann, Andreas & Smeers, Yves, 2005. "Inefficiencies in European congestion management proposals," Utilities Policy, Elsevier, vol. 13(2), pages 135-152, June.
  4. Perez-Arriaga, Ignacio J. & Olmos, Luis, 2005. "A plausible congestion management scheme for the internal electricity market of the European Union," Utilities Policy, Elsevier, vol. 13(2), pages 117-134, June.
  5. Roger E. Bohn & Michael C. Caramanis & Fred C. Schweppe, 1984. "Optimal Pricing in Electrical Networks over Space and Time," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 360-376, Autumn.
  6. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  7. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-79, May.
  8. repec:cto:journl:v:21:y:2002:i:3:p:515-544 is not listed on IDEAS
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Cited by:
  1. Mulder, Machiel & Schoonbeek, Lambert, 2013. "Decomposing changes in competition in the Dutch electricity market through the Residual Supply Index," Research Report 13003-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  2. Hagspiel, Simeon & Jägemann, Cosima & Lindenberger, Dietmar & Brown, Tom & Cherevatskiy, Stanislav & Tröster, Eckehard, 2013. "Cost-Optimal Power System Extension under Flow-Based Market Coupling," EWI Working Papers, Energiewirtschaftliches Institut an der Universitaet zu Koeln 2013-9, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  3. Richter, Jan & Viehmann, Johannes, 2014. "The value of information in explicit cross-border capacity auction regimes in electricity markets," Energy Policy, Elsevier, vol. 70(C), pages 74-84.

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