Strategic Behavior in Day-Ahead and Real-Time Markets for Electricity: Offer Cost or Payment Cost Minimization?

Nicholas Shunda ()

No 2005-48, Working papers from University of Connecticut, Department of Economics

Abstract: 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.

Keywords: strategic behavior; multi-unit auction; wholesale electricity; Bertrand competition (search for similar items in EconPapers)
JEL-codes: C72 D44 L10 L94 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2005-10
New Economics Papers: this item is included in nep-com and nep-ene
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.
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Citations: View citations in EconPapers (2)

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