Auctions with Unknown Capacities: Understanding Competition among Renewables

Gerard Llobet and Natalia Fabra

No 14060, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The energy transition will imply a change in the competitive paradigm of electricity markets. Competition-wise, one distinguishing feature of renewables versus fossil-fuels is that their marginal costs are known but their available capacities are uncertain. Accordingly, in order to understand competition among renewables, we analyze a uniform-price auction in which bidders are privately informed about their random capacities. Renewable plants partially mitigate market power as compared to conventional technologies, but producers are still able to charge positive markups. In particular, firms exercise market power by either withholding output when realized capacities are large, or by raising their bids above marginal costs when realized capacities are small. Since markups are decreasing in realized capacities, a positive capacity shock implies that firms offer to supply more at reduced prices, giving rise to lower but also more volatile market prices. An increase in capacity investment depresses market prices, which converge towards marginal cost when total installed capacity is sufficiently large, or when the market structure is sufficiently fragmented.

Keywords: Multi-unit auctions; Electricity markets; Renewables; forecasts (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-com, nep-des, nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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