Electricity Auctions

Thomas-Olivier Léautier

Journal of Economics & Management Strategy, 2001, vol. 10, issue 3, 331-358

Abstract: This article examines auctions in the electricity industry. We find that the laws of physics that rule power transmission networks defeat ex post productive efficiency: the cheapest combination of generating plants is not always selected, not even in the optimal auction. Furthermore, neither the pay‐your‐bid nor the uniform‐price auction coincides in general with the optimal auction, nor do they yield productive efficiency. Our analysis also sheds light on behavior observed in existing power markets, and leads to policy recommendations. First, producers protected by transmission constraints must see their bids capped in the short run to curb their ability to extract large rents. Second, producers apparently hurt by the unavailability of transmission capacity may benefit from it. Hence, contrary to common wisdom, policy makers cannot rely on them to finance or advocate transmission expansion.

Date: 2001
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https://doi.org/10.1111/j.1430-9134.2001.00331.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jemstr:v:10:y:2001:i:3:p:331-358

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