Efficiency in Deregulated Electricity Markets: Offer Cost Minimization vs. Payment Cost Minimization Auction
This study of the wholesale electricity market compares the efficiency performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed mechanism. The analysis highlights the importance of considering strategic behavior when comparing different institutional systems. We find that in concentrated markets, neither auction mechanism can guarantee an efficient allocation. The advantage of the current mechanism increases with increased price competition if market demand is perfectly inelastic. However, if market demand has some responsiveness to price, the superiority of the current auction with respect to efficiency is not that obvious. We present a case where the proposed auction outperforms the current mechanism on efficiency even if all offers reflect true production costs. We also find that a market designer might face a choice problem with a tradeoff between lower electricity cost and production efficiency. Some implications for social welfare are discussed as well.
|Date of creation:||Mar 2006|
|Date of revision:|
|Note:||The author would like to thank the National Science Foundation for financial support under grant ECS-0323685. The author is grateful to the Engineering and Economics faculty and students at the University of Connecticut working on the electricity project, especially to the PI on the grant Peter Luh and Senior Economist Vicki Knoblauch.|
|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.:
- 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.
When requesting a correction, please mention this item's handle: RePEc:uct:uconnp:2006-04. 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: (Mark McConnel)
If references are entirely missing, you can add them using this form.