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Can a Newly Proposed Mechanism for Allocating Contracts in U.S. Electricity Wholesale Markets Lead to Lower Prices? A Game Theoretic Analysis

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Author Info

  • Vicki Knoblauch

    (University of Connecticut)

Abstract

This study of the wholesale electricity market compares the cost-minimizing performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed replacement. The current mechanism chooses an allocation of contracts that minimizes a fictional cost calculated using pay-as-offer pricing. Then suppliers are paid the market clearing price. The proposed mechanism uses the market clearing price in the allocation phase as well as in the payment phase. In concentrated markets, the proposed mechanism outperforms the current mechanism even when strategic behavior by suppliers is taken into account. The advantage of the proposed mechanism increases with increased price competition.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2004-41.

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Length: 15 pages
Date of creation: Apr 2004
Date of revision: Mar 2006
Handle: RePEc:uct:uconnp:2004-41

Note: The author would like to thank the National Science Foundation, under grant ECS# 0323685 for financial support. The author is grateful to the Engineering and Economics faculty and students at the University of Connecticut and Harvard working on the electricity project, the PI on the grant Peter Luh, David Pepyne, Shi-Chung Chang, William Blankson, Nicholas Shunda, Rimvydas Baltaduonis, Ying Chen, Feng Zhao and Yaming Ma. The author would like to thank in particular Peter Luh and William Blankson for explaining the MCP algorithm to her. The author would also like to thank Dan Kovenock for helpful comments on an earlier version of the paper entitled, "Strategic Behavior in Electricity Wholesale Markets" (2004).
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Web page: http://www.econ.uconn.edu/
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Related research

Keywords: strategic behavior; multi-unit auction; electricity; Bertrand competition;

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  1. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
  2. Supatgiat, Chonawee & Zhang, Rachel Q & Birge, John R, 2001. "Equilibrium Values in a Competitive Power Exchange Market," Computational Economics, Society for Computational Economics, vol. 17(1), pages 93-121, February.
  3. Alfred E. Kahn & Peter Cramton & Robert H. Porter & Richard D. Tabors, 2001. "Pricing in the California Power Exchange Electricity Market: Should California Switch from Uniform Pricing to Pay-as-Bid Pricing?," Papers of Peter Cramton 01calpx, University of Maryland, Department of Economics - Peter Cramton, revised 27 Jan 2001.
  4. Spear, Stephen E., 2003. "The electricity market game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 300-323, April.
  5. Le Coq, ChloƩ, 2002. "Strategic use of available capacity in the electricity spot market," Working Paper Series in Economics and Finance 496, Stockholm School of Economics.
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