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Designing Electricity Auctions

Author

Listed:
  • Natalia Fabra

    (Universidad Carlos III)

  • Nils-Henrik von der Fehr

    (University of Oslo)

  • David Harbord

    (Market Analysis)

Abstract

Motivated by the new auction format introduced in the England and Wales electricity market, as well as the recent debate in California, we characterize bidding behavior and market outcomes in uniform and discriminatory electricity auctions. We find that uniform auctions result in higher average prices than discriminatory auctions, but the ranking in terms of productive efficiency is ambiguous. The comparative effects of other market design features, such as the number of steps in suppliers' bid functions, the duration of bids and the elasticity of demand are also analysed. We also consider the relationship between market structure and market performance in the two auction formats. Finally, we clarify some methodological issues in the analysis of electricity auctions. In particular, we show that analogies with continuous share auctions are misplaced so long as firms are restricted to a finite number of bids.

Suggested Citation

  • Natalia Fabra & Nils-Henrik von der Fehr & David Harbord, 2002. "Designing Electricity Auctions," Microeconomics 0211017, University Library of Munich, Germany, revised 29 Jan 2004.
    • Handle: RePEc:wpa:wuwpmi:0211017
    Note: Type of Document - pdf; prepared on PC-TEX; pages: 37
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    References listed on IDEAS

    as
    1. 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.
    2. Rassenti, Stephen J & Smith, Vernon L & Wilson, Bart J, 2003. "Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels," Journal of Regulatory Economics, Springer, vol. 23(2), pages 109-123, March.
    3. Kahn, Alfred E. & Cramton, Peter C. & Porter, Robert H. & Tabors, Richard D., 2001. "Uniform Pricing or Pay-as-Bid Pricing: A Dilemma for California and Beyond," The Electricity Journal, Elsevier, vol. 14(6), pages 70-79, July.
    4. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1366-1400.
    5. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter.
    6. Eric Maskin & John Riley, 2000. "Asymmetric Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 413-438.
    7. Federico, Giulio & Rahman, David, 2003. "Bidding in an Electricity Pay-as-Bid Auction," Journal of Regulatory Economics, Springer, vol. 24(2), pages 175-211, September.
    8. Parisio, Lucia & Bosco, Bruno, 2003. "Market Power and the Power Market: Multi-unit Bidding and (In)Efficiency in Electricity Auctions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(4), pages 377-401, August.
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    11. Paul Klemperer, 2000. "Why Every Economist Should Learn Some Auction Theory," Microeconomics 0004009, University Library of Munich, Germany.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Market design; electricity; multi-unit auctions; regulatory reform;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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