Wholesale 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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Publisher Info
Paper 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 Handle: RePEc:pcc:pccumd:07cpm
Contact details of provider: Postal: Economics Department, University of Maryland, College Park, MD 20742-7211 Phone: (202) 318-0520 Fax: (202) 318-0520 Web page: http://www.cramton.umd.edu
For technical questions regarding this item, or to correct its listing, contact: (Peter Cramton).
Find related papers by JEL classification: D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
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