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Why We Need to Stick with Uniform-Price Auctions in Electricity Markets

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Abstract

Wholesale electricity markets are commonly organized around a spot energy market. Buyers and suppliers submit bids and offers for each hour and the market is cleared at the price that balances supply and demand. Buyers with bids above the clearing price pay that price, and suppliers with offers below the clearing price are paid that same price. This uniform-price auction, which occurs both daily and throughout the day, is complemented by forward energy markets. In practice, between 80 and 95 percent of wholesale electricity is traded in forward energy markets, often a month, or a year, and sometimes many years ahead of the spot market. However, because forward prices reflect spot prices, in the long run, the spot market determines the total cost of energy. It also plays a critical role in the least-cost scheduling and dispatch of resources, and provides an essential price signal both for short-run performance and long-run investment incentives. Arguments that the uniform-price auction yields electricity prices that are systematically too high are incorrect. However, insufficiently hedged spot prices will result in energy costs that fluctuate above and below the long-run average more than regulated prices and more than is socially optimal. Tampering with the spot price would cause inefficiency and raise long-term costs. The proper way to dampen the impact of spot price fluctuations is with long-term hedging. Although re-regulation can provide a hedge, there are less costly approaches.

Suggested Citation

  • Peter Cramton & Steven Stoft, 2007. "Why We Need to Stick with Uniform-Price Auctions in Electricity Markets," Papers of Peter Cramton 07cpm, University of Maryland, Department of Economics - Peter Cramton, revised 2007.
  • Handle: RePEc:pcc:pccumd:07cpm
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    File URL: http://www.cramton.umd.edu/papers2005-2009/cramton-stoft-clearing-price-markets.pdf
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    Cited by:

    1. Stadler, Michael & Cardoso, Gonçalo & Mashayekh, Salman & Forget, Thibault & DeForest, Nicholas & Agarwal, Ankit & Schönbein, Anna, 2016. "Value streams in microgrids: A literature review," Applied Energy, Elsevier, vol. 162(C), pages 980-989.
    2. Heim, Sven & Götz, Georg, 2013. "Do pay-as-bid auctions favor collusion? Evidence from Germany's market for reserve power," ZEW Discussion Papers 13-035, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. repec:eee:rensus:v:81:y:2018:i:p2:p:2181-2195 is not listed on IDEAS
    4. Manzano, Carolina & Vives, Xavier, 2016. "Market Power and Welfare in Asymmetric Divisible Good Auctions," CEPR Discussion Papers 11731, C.E.P.R. Discussion Papers.
    5. Larson, Nathan & Elmaghraby, Wedad, 2008. "Procurement auctions with avoidable fixed costs: an experimental approach," MPRA Paper 32163, University Library of Munich, Germany, revised 2011.
    6. Mazaher Haji Bashi & Gholamreza Yousefi & Claus Leth Bak & Jayakrishnan Radhakrishna Pillai, 2016. "Long Term Expected Revenue of Wind Farms Considering the Bidding Admission Uncertainty," Energies, MDPI, Open Access Journal, vol. 9(11), pages 1-17, November.
    7. repec:spr:jogath:v:46:y:2017:i:3:d:10.1007_s00182-016-0549-3 is not listed on IDEAS
    8. Briggs, R.J. & Kleit, Andrew, 2013. "Resource adequacy reliability and the impacts of capacity subsidies in competitive electricity markets," Energy Economics, Elsevier, vol. 40(C), pages 297-305.
    9. Isemonger, Alan G., 2009. "The evolving design of RTO ancillary service markets," Energy Policy, Elsevier, vol. 37(1), pages 150-157, January.
    10. Giuseppe Lopomo & Leslie M. Marx & David McAdams & Brian Murray, 2011. "Carbon Allowance Auction Design: An Assessment of Options for the United States," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(1), pages 25-43, Winter.
    11. Bergler, Julian & Heim, Sven & Hüschelrath, Kai, 2017. "Strategic capacity withholding through failures in the German-Austrian electricity market," Energy Policy, Elsevier, vol. 102(C), pages 210-221.
    12. Martin Bichler & Pasha Shabalin & Jürgen Wolf, 2013. "Do core-selecting Combinatorial Clock Auctions always lead to high efficiency? An experimental analysis of spectrum auction designs," Experimental Economics, Springer;Economic Science Association, vol. 16(4), pages 511-545, December.
    13. de Frutos, Maria-Angeles & Fabra, Natalia & Von der Fehr, Nils-Henrik M, 2008. "Investment Incentives and Auction Design in Electricity Markets," CEPR Discussion Papers 6626, C.E.P.R. Discussion Papers.
    14. David McAdams & Giuseppe Lopomo & Leslie Marx & Brian Murray, "undated". "Carbon Allowance Auction Design: An Assessment of Options for the U.S," Working Papers 10-64, Duke University, Department of Economics.

    More about this item

    Keywords

    Auctions; electricity auctions; uniform-price auctions;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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