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Coordinating cross-border congestion management through auctions: An experimental approach to European solutions

  • Céline Jullien

    ()

    (Energy Management - MTS - Management Technologique et Strategique - Grenoble École de Management (GEM))

  • Virginie Pignon

    (EDF R&D Division - EDF R&D - EDF Recherche et Développement)

  • Stéphane Robin

    ()

    (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS)

  • Carine Staropoli

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)

Competition among producers within an integrated electricity system is impeded by any limited transmission capacity there may be at its borders. Two alternative market mechanisms have recently been designed to organize the allocation of scarce transmission capacity at cross-border level: (i) the "implicit auction", already used in some countries, and (ii) the "coordinated explicit auction", proposed by the European Transmission System Operators (ETSO) but not implemented yet. The main advantage of the explicit auction is that it allows each country to keep its own power exchange running. In the European institutional context, this is seen as a factor of success of a market reform, although the explicit auction (not coordinated) is known to be less efficient than the implicit mechanism. The addition of a coordination dimension in the explicit auction is intended to solve problems of international flows. We use an experimental methodology to identify and compare in a laboratory setting the efficiency properties of these two market mechanisms, given a market structure similar to the existing one in continental Europe, i.e. a competitive oligopoly. Our main result highlights the inefficiency of the coordinated explicit auction compared to the performance of the implicit auction, measured in terms of both energy prices and transmission capacity allocation. We suggest that the poor performance of the coordinated explicit auction in the laboratory is due to the level of individual expectations about both energy and transmission prices that the mechanism demands. One solution to resolve this problem when the mechanism is implemented in the field would be to design an additional and secondary market for "used" transmission capacity.

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Paper provided by HAL in its series Grenoble Ecole de Management (Post-Print) with number halshs-00617026.

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Date of creation: Jan 2012
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Handle: RePEc:hal:gemptp:halshs-00617026
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  1. Noussair, Charles & Plott, Charles & Riezman, Raymond., . "An Experimental Investigation of the Patterns of International Trade," Working Papers 799, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  3. Ehrenmann, Andreas & Smeers, Yves, 2005. "Inefficiencies in European congestion management proposals," Utilities Policy, Elsevier, vol. 13(2), pages 135-152, June.
  4. Smith, Vernon L., 2002. "Constructivist and Ecological Rationality in Economics," Nobel Prize in Economics documents 2002-7, Nobel Prize Committee.
  5. Perez-Arriaga, Ignacio J. & Olmos, Luis, 2005. "A plausible congestion management scheme for the internal electricity market of the European Union," Utilities Policy, Elsevier, vol. 13(2), pages 117-134, June.
  6. repec:cto:journl:v:21:y:2002:i:3:p:515-544 is not listed on IDEAS
  7. Roger E. Bohn & Michael C. Caramanis & Fred C. Schweppe, 1984. "Optimal Pricing in Electrical Networks over Space and Time," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 360-376, Autumn.
  8. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-79, May.
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