Coordinating cross-border congestion management through auctions: an experimental approach of European solutions

The creation of an effective "European integrated competitive market" crucially depends on the waycross-border transactions are run. The full potential of the existing European interconnected grid is notrealized with administrative allocation rules whereas there is still no consensus on the efficiency ofalternative mechanisms based on auctions, which are the cornerstones of the newly created electricitymarkets. Our contribution aims at assessing two particular auction rules: the so-called implicit auctionalready applied in some markets and the coordinated explicit auction which is still a project and has never been dealt with analytically up to now. These allocation mechanisms call for further empirical investigations with more realistic assumptions than what has been done up to now. We use experimental methodology to identify and compare the effects of these two market institutions on the economic performances of the electric power market considering a structure configuration akin to thestructure present in the western European electricity sector. We examine the effects of the two auctionsmechanisms on the pattern of both energy prices and transmission prices, on the market efficiency and the surplus. For each institution, we assume a benevolent market operator that maximises the social surplus given the bids of the market participants. Laboratory experiments can be seen as acomplementary tool to analytical models to deal with electricity system complexity. Indeed in multi nodesnetworks, countervailing effects make an analytic analysis difficult. Our results emphasize the superiority in terms of efficiency of the implicit auction and highlight some of the problems encountered by the two rules in the lab. They show that even in a simple environment such as the one we have created in the lab to model the coordinated explicit auction, subjects are not able to anticipate what will happen in the energy market and as a consequence they do not take proper decision in thetransmission capacity market.