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Default supply auctions in electricity markets: Challenges and proposals

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  • Peña, Juan Ignacio
  • Rodriguez, Rosa

Abstract

This paper studies premiums got by winning bidders in default supply auctions, and speculation and hedging activities in power derivatives markets in dates near auctions. Data includes fifty-six auction prices from 2007 to 2013, those of CESUR in the Spanish OMEL electricity market, and those of Basic Generation Service auctions (PJM-BGS) in New Jersey's PJM market. Winning bidders got an average ex-post yearly forward premium of 7% (CESUR) and 38% (PJM-BGS). The premium using an index of futures prices is 1.08% (CESUR) and 24% (PJM-BGS). Ex-post forward premium is negatively related to the number of bidders and spot price volatility. In CESUR, hedging-driven trading in power derivatives markets predominates around auction dates, but in PJM-BGS, speculation-driven trading prevails. The policy recommendation to market regulators and administrators is that they should gauge consumers’ price risk aversion before introducing alternative methods to default supply auctions for the computation of the part of cost of energy of the electricity bill of customers whose contracted capacity is small and are not served by other suppliers.

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  • Peña, Juan Ignacio & Rodriguez, Rosa, 2018. "Default supply auctions in electricity markets: Challenges and proposals," Energy Policy, Elsevier, vol. 122(C), pages 142-151.
    • Handle: RePEc:eee:enepol:v:122:y:2018:i:c:p:142-151
    DOI: 10.1016/j.enpol.2018.07.031
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    Cited by:

    1. Palacio, Sebastián M., 2020. "Predicting collusive patterns in a liberalized electricity market with mandatory auctions of forward contracts," Energy Policy, Elsevier, vol. 139(C).

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    More about this item

    Keywords

    C51; G13; L94; Q40; Electricity markets; Default supply auctions; Speculation and hedging; Power derivatives;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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