Strategic Behavior in Day-Ahead and Real-Time Markets for Electricity: Offer Cost or Payment Cost Minimization?
This study compares the procurement cost-minimizing and productive efficiency performance of the auction mechanism used by independent system operators (ISOs) in wholesale electricity auction markets in the U.S. with that of a proposed alternative. The current practice allocates energy contracts as if the auction featured a discriminatory final payment method when, in fact, the markets are uniform price auctions. The proposed alternative explicitly accounts for the market clearing price during the allocation phase. We find that the proposed alternative largely outperforms the current practice on the basis of procurement costs in the context of simple auction markets featuring both day-ahead and real-time auctions and that the procurement cost advantage of the alternative is complete when we simulate the effects of increased competition. We also find that a trade-off between the objectives of procurement cost minimization and productive efficiency emerges in our simple auction markets and persists in the face of increased competition.
|Date of creation:||Oct 2005|
|Date of revision:|
|Note:||I am grateful for the insightful comments from and helpful discussions with Vicki Knoblauch, Peter Luh, Joseph Yan, and William Blankson while this paper was being written. Generous financial support from the National Science Foundation under grant ECS-03233685 is gratefully acknowledged.|
|Contact details of provider:|| Postal: |
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nicolaisen, James & Petrov, Valentin & Tesfatsion, Leigh S., 2000.
"Market Power and Efficiency in a Computational Electricity Market with Discriminatory Double-Auction Pricing,"
Staff General Research Papers
1952, Iowa State University, Department of Economics.
- Nicolaisen, James & Petrov, Valentin & Tesfatsion, Leigh S., 2001. "Market Power and Efficiency in a Computational Electricity Market with Discriminatory Double-Auction Pricing," Staff General Research Papers 2050, Iowa State University, Department of Economics.
- James Nicolaisen & Valentin Petrov & Leigh Tesfatsion, 2000. "Market Power and Efficiency in a Computational Electricity Market with Discriminatory Double-Auction Pricing," Computational Economics 0004005, EconWPA.
- Natalia Fabra & Nils‐Henrik Fehr & David Harbord, 2006.
"Designing electricity auctions,"
RAND Journal of Economics,
RAND Corporation, vol. 37(1), pages 23-46, 03.
- Severin Borenstein & James Bushnell, 1998.
"An Empirical Analysis of the Potential for Market Power in California's Electricity Industry,"
NBER Working Papers
6463, National Bureau of Economic Research, Inc.
- Borenstein, Severin & Bushnell, James, 1999. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 285-323, September.
- Le Coq, Chloé, 2002. "Strategic use of available capacity in the electricity spot market," SSE/EFI Working Paper Series in Economics and Finance 496, Stockholm School of Economics.
- Frank A. Wolak & Robert H. Patrick, 2001. "The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market," NBER Working Papers 8248, National Bureau of Economic Research, Inc.
- Green, Richard J & Newbery, David M, 1992.
"Competition in the British Electricity Spot Market,"
Journal of Political Economy,
University of Chicago Press, vol. 100(5), pages 929-53, October.
- Green, Richard & Newbery, David M G, 1991. "Competition in the British Electricity Spot Market," CEPR Discussion Papers 557, C.E.P.R. Discussion Papers.
- Spear, Stephen E., 2003.
"The electricity market game,"
Journal of Economic Theory,
Elsevier, vol. 109(2), pages 300-323, April.
- Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
- Yan, Joseph H. & Stern, Gary A., 2002. "Simultaneous Optimal Auction and Unit Commitment for Deregulated Electricity Markets," The Electricity Journal, Elsevier, vol. 15(9), pages 72-80, November.
- Nils-Henrik von der Fehr & David Harbord, 2002.
"Competition in Electricity Spot Markets: Economic Theory and International Experience,"
- von der Fehr, N.-H. & Harbord,D., 1998. "Competition in Electricity Spot Markets. Economic Theory and International Experience," Memorandum 05/1998, Oslo University, Department of Economics.
- Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
- Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
- Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
- Alfred E. Kahn & Peter Cramton & Robert H. Porter & Richard D. Tabors, 2001. "Pricing in the California Power Exchange Electricity Market: Should California Switch from Uniform Pricing to Pay-as-Bid Pricing?," Papers of Peter Cramton 01calpx, University of Maryland, Department of Economics - Peter Cramton, revised 27 Jan 2001.
When requesting a correction, please mention this item's handle: RePEc:uct:uconnp:2005-48. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Francis Ahking)
If references are entirely missing, you can add them using this form.