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Electricity Auctions

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  • Thomas‐Olivier Léautier

Abstract

This article examines auctions in the electricity industry. We find that the laws of physics that rule power transmission networks defeat ex post productive efficiency: the cheapest combination of generating plants is not always selected, not even in the optimal auction. Furthermore, neither the pay‐your‐bid nor the uniform‐price auction coincides in general with the optimal auction, nor do they yield productive efficiency. Our analysis also sheds light on behavior observed in existing power markets, and leads to policy recommendations. First, producers protected by transmission constraints must see their bids capped in the short run to curb their ability to extract large rents. Second, producers apparently hurt by the unavailability of transmission capacity may benefit from it. Hence, contrary to common wisdom, policy makers cannot rely on them to finance or advocate transmission expansion.

Suggested Citation

  • Thomas‐Olivier Léautier, 2001. "Electricity Auctions," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 331-358, September.
    • Handle: RePEc:bla:jemstr:v:10:y:2001:i:3:p:331-358
    DOI: 10.1111/j.1430-9134.2001.00331.x
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    File URL: https://doi.org/10.1111/j.1430-9134.2001.00331.x
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    References listed on IDEAS

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    1. Shmuel S. Oren, 1997. "Economic Inefficiency of Passive Transmission Rights in Congested Electricity Systems with Competitive Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 63-83.
    2. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
    3. Severin Borenstein & James. Bushnell & Steven Stoft, 2000. "The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 294-325, Summer.
    4. Rothkopf, Michael H., 1999. "Daily Repetition: A Neglected Factor in the Analysis of Electricity Auctions," The Electricity Journal, Elsevier, vol. 12(3), pages 60-70, April.
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    Cited by:

    1. López, Iraide & Goitia-Zabaleta, Nerea & Milo, Aitor & Gómez-Cornejo, Julen & Aranzabal, Itxaso & Gaztañaga, Haizea & Fernandez, Elvira, 2024. "European energy communities: Characteristics, trends, business models and legal framework," Renewable and Sustainable Energy Reviews, Elsevier, vol. 197(C).
    2. Evans, Lewis & Meade, Richard, 2001. "Economic Analysis of Financial Transmission Rights (FTRs) with Specific Reference to the Transpower Proposal for New Zealand," Working Paper Series 3902, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. Luca Grilli, 2010. "Deregulated Electricity Market and Auctions: the Italian case," Quaderni DSEMS lg_ib_2010, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.

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