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(1) Modelling RETA: A Model of Forward Trading and the Balancing Mechanism AND (2) Rebidding in the Balancing Mechanism: An Economic Analysis

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Abstract

(1) The authors solve a two-stage model of electricity trading, with a forward market and a pay-bid balancing mechanism. They derive balancing mechanism strategies for generators which have sold forward and been scheduled to run, and for those which have not. Given these strategies, we can derive arbitrage conditions on the forward prices at which buyers and generators would be willing to trade. The market equilibrium implies that the expected level of output would be sold forward, and the expected price in the balancing mechanism would be equal to the marginal cost of this level of output. AND (2) Generators compete to sell extra power to the system operator in a balancing mechanism. The quantity required is equal to the sum of two random shocks. If bids are made before either shock is known, the average price paid will rise with the quantity demanded, but by much less than marginal cost. If those bidders who have not been scheduled after the first shock are allowed to change their bids, the expected average price paid will be more responsive to the quantity demanded (without changing any generator's expected revenues), but the correlation between price and quantity will be

Suggested Citation

  • McDaniel, T. & Green, R., 1999. "(1) Modelling RETA: A Model of Forward Trading and the Balancing Mechanism AND (2) Rebidding in the Balancing Mechanism: An Economic Analysis," Cambridge Working Papers in Economics 0002, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0002
    Note: IO
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    Keywords

    Bidding; Generation; RETA; Pay-bid; SMP;

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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