Why We Need to Stick with Uniform-Price Auctions in Electricity Markets
AbstractWholesale electricity markets are commonly organized around a spot energy market. Buyers and suppliers submit bids and offers for each hour and the market is cleared at the price that balances supply and demand. Buyers with bids above the clearing price pay that price, and suppliers with offers below the clearing price are paid that same price. This uniform-price auction, which occurs both daily and throughout the day, is complemented by forward energy markets. In practice, between 80 and 95 percent of wholesale electricity is traded in forward energy markets, often a month, or a year, and sometimes many years ahead of the spot market. However, because forward prices reflect spot prices, in the long run, the spot market determines the total cost of energy. It also plays a critical role in the least-cost scheduling and dispatch of resources, and provides an essential price signal both for short-run performance and long-run investment incentives. Arguments that the uniform-price auction yields electricity prices that are systematically too high are incorrect. However, insufficiently hedged spot prices will result in energy costs that fluctuate above and below the long-run average more than regulated prices and more than is socially optimal. Tampering with the spot price would cause inefficiency and raise long-term costs. The proper way to dampen the impact of spot price fluctuations is with long-term hedging. Although re-regulation can provide a hedge, there are less costly approaches.
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Bibliographic InfoPaper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 07cpm.
Length: 11 pages
Date of creation: 2007
Date of revision: 2007
Publication status: Published in Electricity Journal, 20:1, 26-37, 2007
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Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
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Auctions; electricity auctions; uniform-price auctions;
Other versions of this item:
- Cramton, Peter & Stoft, Steven, 2007. "Why We Need to Stick with Uniform-Price Auctions in Electricity Markets," The Electricity Journal, Elsevier, vol. 20(1), pages 26-37.
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
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- Sven Heim & Georg Götz, 2013.
"Do pay-as-bid auctions favor collusion? - Evidence from Germany’s market for reserve power,"
MAGKS Papers on Economics
201324, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
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