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Generators' bidding behavior in the NYISO day-ahead wholesale electricity market

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  • Zhang, Ning

Abstract

This paper proposes a statistical and econometric model to analyze the generators' bidding behavior in the NYISO day-ahead wholesale electricity market. The generator level bidding data show very strong persistence in generators' grouping choices over time. Using dynamic random effect ordered probit model, we find that persistence is characterized by positive state dependence and unobserved heterogeneity and state dependence is more important than unobserved heterogeneity. The finding of true state dependence suggests a scope for economic policy intervention. If NYISO can implement an effective policy to switch generators from higher price groups to lower price groups, the effect is likely to be lasting. As a result, the market price can be lowered in the long-run. Generators' offered capacity is estimated by a two-stage sample selection model. The estimated results show that generators in higher-priced groups tend to withhold their capacity strategically to push up market prices. It further confirms the importance of an effective policy to turn generators into lower price groups in order to mitigate unexpected price spikes. The simulated market prices based on our estimated aggregate supply curve can replicate most volatility of actual DA market prices. Applying our models to different demand assumptions, we find that demand conditions can affect market prices significantly. It validates the importance of introducing demand side management during the restructure of electricity industry.

Suggested Citation

  • Zhang, Ning, 2009. "Generators' bidding behavior in the NYISO day-ahead wholesale electricity market," Energy Economics, Elsevier, vol. 31(6), pages 897-913, November.
  • Handle: RePEc:eee:eneeco:v:31:y:2009:i:6:p:897-913
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    References listed on IDEAS

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    1. 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, pages 1376-1405.
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    4. Catherine D. Wolfram, 1998. "Strategic Bidding in a Multiunit Auction: An Empirical Analysis of Bids to Supply Electricity in England and Wales," RAND Journal of Economics, The RAND Corporation, pages 703-725.
    5. Jeffrey M. Wooldridge, 2005. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(1), pages 39-54.
    6. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1366-1400.
    7. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", pages 129-137.
    8. Kaiser, Ulrich & Wright, Julian, 2006. "Price structure in two-sided markets: Evidence from the magazine industry," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 1-28, January.
    9. Frank A. Wolak, 2003. "Measuring Unilateral Market Power in Wholesale Electricity Markets: The California Market, 1998–2000," American Economic Review, American Economic Association, pages 425-430.
    10. Kaiser, Ulrich & Kongsted, Hans Christian, 2004. "True Versus Spurious State Dependence in Firm Performance: The Case of West German Exports," ZEW Discussion Papers 04-81, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    11. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Society for Financial Studies, pages 733-764.
    12. Jaime F. Zender & James J.D. Wang, 2002. "Auctioning divisible goods," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 673-705.
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    Cited by:

    1. Clements, A.E. & Hurn, A.S. & Li, Z., 2016. "Strategic bidding and rebidding in electricity markets," Energy Economics, Elsevier, pages 24-36.
    2. Malliaris, A.G. & Kyrtsou, C., 2009. "Editorial introduction of the special issue: "Energy sector pricing and macroeconomic dynamics"," Energy Economics, Elsevier, vol. 31(6), pages 825-826, November.
    3. John Kwoka & Vladlena Sabodash, 2011. "Price Spikes in Energy Markets: “Business by Usual Methods” or Strategic Withholding?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(3), pages 285-310, May.

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