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Designing Electricity Auctions

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Author Info

  • Natalia Fabra

    (Universidad Carlos III)

  • Nils-Henrik von der Fehr

    (University of Oslo)

  • David Harbord

    (Market Analysis)

Abstract

Motivated by the new auction format introduced in the England and Wales electricity market, as well as the recent debate in California, we characterize bidding behavior and market outcomes in uniform and discriminatory electricity auctions. We find that uniform auctions result in higher average prices than discriminatory auctions, but the ranking in terms of productive efficiency is ambiguous. The comparative effects of other market design features, such as the number of steps in suppliers' bid functions, the duration of bids and the elasticity of demand are also analysed. We also consider the relationship between market structure and market performance in the two auction formats. Finally, we clarify some methodological issues in the analysis of electricity auctions. In particular, we show that analogies with continuous share auctions are misplaced so long as firms are restricted to a finite number of bids.

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File URL: http://128.118.178.162/eps/mic/papers/0211/0211017.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 0211017.

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Length: 37 pages
Date of creation: 21 Nov 2002
Date of revision: 31 Aug 2003
Handle: RePEc:wpa:wuwpmi:0211017

Note: Type of Document - pdf; prepared on PC-TEX; pages: 37
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Web page: http://128.118.178.162

Related research

Keywords: Market design; electricity; multi-unit auctions; regulatory reform;

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References

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  1. Paul Klemperer, 2000. "Why Every Economist Should Learn Some Auction Theory," Microeconomics 0004009, EconWPA.
  2. Parisio, Lucia & Bosco, Bruno, 2003. "Market Power and the Power Market: Multi-unit Bidding and (In)Efficiency in Electricity Auctions," International Tax and Public Finance, Springer, vol. 10(4), pages 377-401, August.
  3. García-Díaz, Antón & Marín Uribe, Pedro Luis, 2000. "Strategic Bidding in Electricity Pools with Short-Lived Bids: An Application to the Spanish Market," CEPR Discussion Papers 2567, C.E.P.R. Discussion Papers.
  4. Natalia Fabra, 2003. "Tacit Collusion in Repeated Auctions: Uniform Versus Discriminatory," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 271-293, 09.
  5. Alfred E. Kahn & Peter Cramton & Robert H. Porter & Richard D. Tabors, 2001. "Uniform Pricing or Pay-as-Bid Pricing: A Dilemma for California and Beyond," Papers of Peter Cramton 01ej, University of Maryland, Department of Economics - Peter Cramton, revised 27 Jan 2001.
  6. 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.
  7. Giulio Federico & David Rahman, 2001. "Bidding in an Electricity Pay-as-Bid Auction," Economics Series Working Papers 2001-W05, University of Oxford, Department of Economics.
  8. Klemperer, Paul, 2000. "What Really Matters in Auction Design," CEPR Discussion Papers 2581, C.E.P.R. Discussion Papers.
  9. Nils-Henrik von der Fehr & David Harbord, 2002. "Competition in Electricity Spot Markets: Economic Theory and International Experience," Industrial Organization 0203006, EconWPA.
  10. Peter Cramton & Robert Wilson, 1998. "A Review of ISO New England's Proposed Market Rules," Papers of Peter Cramton 98mdi, University of Maryland, Department of Economics - Peter Cramton.
  11. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
  12. Lawrence M. Ausubel & Peter Cramton, 2004. "Vickrey Auctions with Reserve Pricing," Papers of Peter Cramton 99wpvic, University of Maryland, Department of Economics - Peter Cramton, revised 28 Jun 1999.
  13. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-46, May.
  14. Brunekreeft, Gert, 2001. "A multiple-unit, multiple-period auction in the British electricity spot market," Energy Economics, Elsevier, vol. 23(1), pages 99-118, January.
  15. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
  16. Rothkopf, Michael H & Teisberg, Thomas J & Kahn, Edward P, 1990. "Why Are Vickrey Auctions Rare?," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 94-109, February.
  17. Author One David Harbord & Author Two Chris McCoy, 2002. "Mis-Designing the UK Electricity Market," Industrial Organization 0203003, EconWPA.
  18. Lisa Cameron & Peter Cramton, 1999. "The Role of the ISO in U.S. Electricity Markets: A Review of Restructuring in California and PJM," Papers of Peter Cramton 99ej, University of Maryland, Department of Economics - Peter Cramton, revised 01 Apr 1999.
  19. Hobbs, Benjamin F, et al, 2000. "Evaluation of a Truthful Revelation Auction in the Context of Energy Markets with Nonconcave Benefits," Journal of Regulatory Economics, Springer, vol. 18(1), pages 5-32, July.
  20. Rassenti, Stephen J & Smith, Vernon L & Wilson, Bart J, 2003. "Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels," Journal of Regulatory Economics, Springer, vol. 23(2), pages 109-23, March.
  21. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November.
  22. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
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