IDEAS home Printed from https://ideas.repec.org/p/ris/albaec/2021_014.html
   My bibliography  Save this paper

Procurement Auctions for Regulated Retail Service Contracts in Restructured Electricity Markets

Author

Listed:
  • Brown, David P.

    (University of Alberta, Department of Economics)

  • Eckert, Andrew

    (University of Alberta, Department of Economics)

  • Olmstead, Derek E.H.

    (University of Calgary)

Abstract

A challenge in setting regulated rates for default retail electricity products is the presence of both price and quantity risk faced by retailers. To address this challenge, regulators have been increasingly employing competition via full-load (load following) auctions to value these risks. In a full-load auction, firms bid to supply a fixed percentage of the regulated utility's hourly demand at a fixed price. In this paper, we develop a model of break-even pricing of electricity forward products under risk aversion, based on a mean-variance utility function. We use this model to evaluate the performance of full-load auctions in Alberta, where the largest regulated retail provider adopted such auctions in December 2018. We find that winning full-load bids exceed break-even levels, even allowing for risk-aversion, but that the difference falls over time. This reduction coincides with an increase in the number of bidders active in the full-load auctions. Our paper highlights the importance of sufficient participation for the success of full-load auctions and the potential role for competitive markets in determining the value of risk faced by retailers.

Suggested Citation

  • Brown, David P. & Eckert, Andrew & Olmstead, Derek E.H., 2021. "Procurement Auctions for Regulated Retail Service Contracts in Restructured Electricity Markets," Working Papers 2021-14, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2021_014
    as

    Download full text from publisher

    File URL: https://sites.ualberta.ca/~econwps/2021/wp2021-14.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lucas W. Davis & Catherine Wolfram, 2012. "Deregulation, Consolidation, and Efficiency: Evidence from US Nuclear Power," American Economic Journal: Applied Economics, American Economic Association, vol. 4(4), pages 194-225, October.
    2. Ulrich Doraszelski & Gregory Lewis & Ariel Pakes, 2018. "Just Starting Out: Learning and Equilibrium in a New Market," American Economic Review, American Economic Association, vol. 108(3), pages 565-615, March.
    3. Esplin, Ryan & Davis, Ben & Rai, Alan & Nelson, Tim, 2020. "The impacts of price regulation on price dispersion in Australia's retail electricity markets," Energy Policy, Elsevier, vol. 147(C).
    4. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, vol. 98(1), pages 237-266, March.
    5. repec:dau:papers:123456789/11029 is not listed on IDEAS
    6. Chemla, Gilles & Touzi, Nizar & Aïd, René & Porchet, Arnaud, 2011. "Hedging and Vertical Integration in Electricity Markets," CEPR Discussion Papers 8313, C.E.P.R. Discussion Papers.
    7. Woo, C.K. & Sreedharan, P. & Hargreaves, J. & Kahrl, F. & Wang, J. & Horowitz, I., 2014. "A review of electricity product differentiation," Applied Energy, Elsevier, vol. 114(C), pages 262-272.
    8. Severin Borenstein & James Bushnell, 2015. "The US Electricity Industry After 20 Years of Restructuring," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 437-463, August.
    9. Steve Cicala, 2022. "Imperfect Markets versus Imperfect Regulation in US Electricity Generation," American Economic Review, American Economic Association, vol. 112(2), pages 409-441, February.
    10. Steve Cicala, 2015. "When Does Regulation Distort Costs? Lessons from Fuel Procurement in US Electricity Generation," American Economic Review, American Economic Association, vol. 105(1), pages 411-444, January.
    11. David P. Brown & Derek E. H. Olmstead, 2017. "Measuring market power and the efficiency of Alberta's restructured electricity market: An energy‐only market design," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(3), pages 838-870, August.
    12. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, June.
    13. Juan Ignacio Peña and Rosa Rodríguez, 2022. "Market Makers and Liquidity Premium in Electricity Futures Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    14. Brown, David P. & Eckert, Andrew, 2018. "The effect of default rates on retail competition and pricing decisions of competitive retailers: The case of Alberta," Energy Policy, Elsevier, vol. 118(C), pages 298-311.
    15. Colin Loxley & David Salant, 2004. "Default Service Auctions," Journal of Regulatory Economics, Springer, vol. 26(2), pages 201-229, September.
    16. de Castro, Luciano & Negrete-Pincetic, Matias & Gross, George, 2008. "Product Definition for Future Electricity Supply Auctions: The 2006 Illinois Experience," The Electricity Journal, Elsevier, vol. 21(7), pages 50-62.
    17. René Aïd & Gilles Chemla & Arnaud Porchet & Nizar Touzi, 2011. "Hedging and Vertical Integration in Electricity Markets," Post-Print hal-02304220, HAL.
    18. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
    19. Christian Redl & Derek Bunn, 2013. "Determinants of the premium in forward contracts," Journal of Regulatory Economics, Springer, vol. 43(1), pages 90-111, January.
    20. Seth Blumsack & Dmitri Perekhodtsev, 2009. "Electricity Retail Competition and Pricing: An International Review," Chapters, in: Joanne Evans & Lester C. Hunt (ed.), International Handbook on the Economics of Energy, chapter 28, Edward Elgar Publishing.
    21. René Aïd & Gilles Chemla & Arnaud Porchet & Nizar Touzi, 2011. "Hedging and Vertical Integration in Electricity Markets," Management Science, INFORMS, vol. 57(8), pages 1438-1452, August.
    22. LaCasse, Chantale & Wininger, Thomas, 2007. "Maryland versus New Jersey: Is There a "Best" Competitive Bid Process?," The Electricity Journal, Elsevier, vol. 20(3), pages 46-59, April.
    23. Willems, Bert & Morbee, Joris, 2010. "Market completeness: How options affect hedging and investments in the electricity sector," Energy Economics, Elsevier, vol. 32(4), pages 786-795, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. David P. Brown & David E. M. Sappington, 2023. "Employing gain-sharing regulation to promote forward contracting in the electricity sector," Journal of Regulatory Economics, Springer, vol. 63(1), pages 30-56, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David P. Brown & David E. M. Sappington, 2022. "Vertical integration and capacity investment in the electricity sector," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 193-226, February.
    2. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    3. Heikki Peura & Derek W. Bunn, 2021. "Renewable Power and Electricity Prices: The Impact of Forward Markets," Management Science, INFORMS, vol. 67(8), pages 4772-4788, August.
    4. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    5. Brown, David P. & Sappington, David E.M., 2020. "Load-Following Forward Contracts," Working Papers 2020-14, University of Alberta, Department of Economics, revised 31 Dec 2021.
    6. de Bragança, Gabriel Godofredo Fiuza & Daglish, Toby, 2017. "Investing in vertical integration: electricity retail market participation," Energy Economics, Elsevier, vol. 67(C), pages 355-365.
    7. David P. Brown & Andrew Eckert & Douglas Silveira, 2023. "Strategic interaction between wholesale and ancillary service markets," Competition and Regulation in Network Industries, , vol. 24(4), pages 174-198, December.
    8. Meunier, Guy, 2013. "Risk aversion and technology mix in an electricity market," Energy Economics, Elsevier, vol. 40(C), pages 866-874.
    9. Russo, Marianna & Bertsch, Valentin, 2020. "A looming revolution: Implications of self-generation for the risk exposure of retailers," Energy Economics, Elsevier, vol. 92(C).
    10. Alexander Hill, 2023. "Price freezes and gas pass-through: an estimation of the price impact of electricity market restructuring," Journal of Regulatory Economics, Springer, vol. 63(1), pages 87-116, April.
    11. Knittel, Christopher R. & Metaxoglou, Konstantinos & Trindade, André, 2019. "Environmental implications of market structure: Shale gas and electricity markets," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 511-550.
    12. Paolo Falbo & Carlos Ruiz, 2021. "Joint optimization of sales-mix and generation plan for a large electricity producer," Papers 2110.02016, arXiv.org.
    13. David P. Brown & Derek E. H. Olmstead, 2017. "Measuring market power and the efficiency of Alberta's restructured electricity market: An energy-only market design," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 838-870, August.
    14. Cao, K.H. & Qi, H.S. & Tsai, C.H. & Woo, C.K. & Zarnikau, J., 2021. "Energy trading efficiency in the US Midcontinent electricity markets," Applied Energy, Elsevier, vol. 302(C).
    15. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.
    16. Abate, Arega Getaneh & Riccardi, Rossana & Ruiz, Carlos, 2022. "Contract design in electricity markets with high penetration of renewables: A two-stage approach," Omega, Elsevier, vol. 111(C).
    17. Boroumand, Raphaël-Homayoun & Goutte, Stéphane & Guesmi, Khaled & Porcher, Thomas, 2019. "Potential benefits of optimal intra-day electricity hedging for the environment: The perspective of electricity retailers," Energy Policy, Elsevier, vol. 132(C), pages 1120-1129.
    18. Wang, Chang & Guo, Yue & Yang, Yu & Chen, Shiyi, 2022. "The environmental benefits of electricity industry restructuring in China: Ownership mixing vs. vertical unbundling," Energy Economics, Elsevier, vol. 115(C).
    19. Ren'e Aid & Luciano Campi & Delphine Lautier, 2015. "On the spot-futures no-arbitrage relations in commodity markets," Papers 1501.00273, arXiv.org, revised Feb 2018.
    20. Russo, Marianna & Kraft, Emil & Bertsch, Valentin & Keles, Dogan, 2022. "Short-term risk management of electricity retailers under rising shares of decentralized solar generation," Energy Economics, Elsevier, vol. 109(C).

    More about this item

    Keywords

    Electricity; Forward Contracts; Regulation; Procurement Auctions;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:albaec:2021_014. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joseph Marchand (email available below). General contact details of provider: https://edirc.repec.org/data/deualca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.