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Procurement Auctions for Regulated Retail Service Contracts in Restructured Electricity Markets

Author

Listed:
  • David P. Brown

    (University of Alberta, Department of Economics)

  • Andrew Eckert

    (University of Alberta, Department of Economics)

  • Derek E.H. Olmstead

    (University of Calgary)

Abstract

A challenge in setting regulated rates for default retail electricity products is the presence of both price and quantity risk faced by retailers. To address this challenge, regulators have been increasingly employing competition via full-load (load following) auctions to value these risks. In a full-load auction, firms bid to supply a fixed percentage of the regulated utility's hourly demand at a fixed price. In this paper, we develop a model of break-even pricing of electricity forward products under risk aversion, based on a mean-variance utility function. We use this model to evaluate the performance of full-load auctions in Alberta, where the largest regulated retail provider adopted such auctions in December 2018. We find that winning full-load bids exceed break-even levels, even allowing for risk-aversion, but that the difference falls over time. This reduction coincides with an increase in the number of bidders active in the full-load auctions. Our paper highlights the importance of sufficient participation for the success of full-load auctions and the potential role for competitive markets in determining the value of risk faced by retailers.

Suggested Citation

  • David P. Brown & Andrew Eckert & Derek E.H. Olmstead, 2021. "Procurement Auctions for Regulated Retail Service Contracts in Restructured Electricity Markets," Working Papers 2021-14, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2021_014
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    File URL: https://sites.ualberta.ca/~econwps/2021/wp2021-14.pdf
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    Cited by:

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    2. David P. Brown & David E. M. Sappington, 2023. "Employing gain-sharing regulation to promote forward contracting in the electricity sector," Journal of Regulatory Economics, Springer, vol. 63(1), pages 30-56, April.
    3. Dormady, Noah & Roa-Henriquez, Alfredo & Hoyt, Matthew & Pesavento, Matthew & Koenig, Grace & Welch, William & Li, Zejun, 2025. "How are retail prices formed in restructured electricity markets?," Energy Economics, Elsevier, vol. 143(C).
    4. Olmstead, Derek E.H. & Yatchew, Adonis, 2025. "Alberta's electricity futures market: An empirical analysis of price formation," Energy Economics, Elsevier, vol. 143(C).

    More about this item

    Keywords

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    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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