This study compares the procurement cost-minimizing and productive efficiency performance of the auction mechanism used by independent system operators (ISOs) in wholesale electricity auction markets in the U.S. with that of a proposed alternative. The current practice allocates energy contracts as if the auction featured a discriminatory final payment method when, in fact, the markets are uniform price auctions. The proposed alternative explicitly accounts for the market clearing price during the allocation phase. We find that the proposed alternative largely outperforms the current practice on the basis of procurement costs in the context of simple auction markets featuring both day-ahead and real-time auctions and that the procurement cost advantage of the alternative is complete when we simulate the effects of increased competition. We also find that a trade-off between the objectives of procurement cost minimization and productive efficiency emerges in our simple auction markets and persists in the face of increased competition.
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number
2005-48.
Length: 33 pages Date of creation: Oct 2005 Date of revision: Handle: RePEc:uct:uconnp:2005-48
Note: I am grateful for the insightful comments from and helpful discussions with Vicki Knoblauch, Peter Luh, Joseph Yan, and William Blankson while this paper was being written. Generous financial support from the National Science Foundation under grant ECS-03233685 is gratefully acknowledged. Contact details of provider: Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063 Phone: (860) 486-4889 Fax: (860) 486-4463 Web page: http://www.econ.uconn.edu/ More information through EDIRC
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Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D44 - Microeconomics - - Market Structure and Pricing - - - Auctions L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Natalia Fabra & Nils-Henrik von der Fehr & David Harbord, 2002.
"Designing Electricity Auctions,"
Microeconomics
0211017, EconWPA, revised 31 Aug 2003.
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