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Auction Design for a Strategic Reserve Market for Generation Adequacy: On the Incentives Under Different Auction Scoring Rules

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Listed:
  • Gert Brunekreeft
  • Roland Meyer
  • Margarethe Rammerstorfer

Abstract

How should we select winning bids of generation units for strategic reserves that consist of capacity bids and energy bids? In this paper, we analyze two selecting mechanisms (scoring rules): “simultaneous” and “sequential”. In case of a simultaneous scoring rule, capacity and energy bids are weighted and combined to a single score based on which the cheapest bids are selected. Under sequential scoring rule the selection depends solely on capacity bids. In both cases the energy bids are used to form the merit order for dispatch. We find that the main difference between the simultaneous and sequential scoring mechanism is that under sequential scoring the bids are biased towards lower capacity bids and higher energy bids, since it is only the capacity part that “opens the door” to the reserve market. We find that a simultaneous scoring is favorable from a welfare perspective, since it avoids the strategic incentives for excessive mark-ups on energy costs and limits the incentives for collusive behavior. This reduces the risk of inefficient selection and dispatch of reserve units compared to a sequential scoring mechanism.

Suggested Citation

  • Gert Brunekreeft & Roland Meyer & Margarethe Rammerstorfer, 2013. "Auction Design for a Strategic Reserve Market for Generation Adequacy: On the Incentives Under Different Auction Scoring Rules," Bremen Energy Working Papers 0014, Bremen Energy Research.
  • Handle: RePEc:bei:00bewp:0014
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    File URL: http://bremen-energy-research.de/wp-content/bewp/bewp14.pdf
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    References listed on IDEAS

    as
    1. Bushnell, James B & Oren, Shmuel S, 1994. "Bidder Cost Revelation in Electric Power Auctions," Journal of Regulatory Economics, Springer, vol. 6(1), pages 5-26, February.
    2. 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 109-123, March.
    3. 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.
    4. Federico, Giulio & Rahman, David, 2003. "Bidding in an Electricity Pay-as-Bid Auction," Journal of Regulatory Economics, Springer, vol. 24(2), pages 175-211, September.
    5. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, March.
    6. Peter Cramton & Steven Stoft, 2006. "The Convergence of Market Designs for Adequate Generating Capacity," Papers of Peter Cramton 06mdfra, University of Maryland, Department of Economics - Peter Cramton, revised 2006.
    7. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring.
    8. Ausubel, Lawerence M. & Cramton, Peter, 1998. "The optimality of being efficient : designing auctions," Policy Research Working Paper Series 1985, The World Bank.
    9. Chao, Hung-Po & Wilson, Robert, 2002. "Multi-dimensional Procurement Auctions for Power Reserves: Robust Incentive-Compatible Scoring and Settlement Rules," Journal of Regulatory Economics, Springer, vol. 22(2), pages 161-183, September.
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    More about this item

    Keywords

    electricity; generation adequacy; market design; auction design; reserve market;

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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