Procurement Auctions for Regulated Retail Service Contracts in Restructured Electricity Markets

David Brown, Andrew Eckert and Derek E.H. Olmstead ()
Additional contact information
Derek E.H. Olmstead: University of Calgary

No 2021-14, Working Papers from University of Alberta, Department of Economics

Abstract: A challenge in setting regulated rates for default retail electricity products is the presence of both price and quantity risk faced by retailers. To address this challenge, regulators have been increasingly employing competition via full-load (load following) auctions to value these risks. In a full-load auction, firms bid to supply a fixed percentage of the regulated utility's hourly demand at a fixed price. In this paper, we develop a model of break-even pricing of electricity forward products under risk aversion, based on a mean-variance utility function. We use this model to evaluate the performance of full-load auctions in Alberta, where the largest regulated retail provider adopted such auctions in December 2018. We find that winning full-load bids exceed break-even levels, even allowing for risk-aversion, but that the difference falls over time. This reduction coincides with an increase in the number of bidders active in the full-load auctions. Our paper highlights the importance of sufficient participation for the success of full-load auctions and the potential role for competitive markets in determining the value of risk faced by retailers.

Keywords: Electricity; Forward Contracts; Regulation; Procurement Auctions (search for similar items in EconPapers)
JEL-codes: L51 L94 Q48 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2021-12-31
New Economics Papers: this item is included in nep-com, nep-cta, nep-des, nep-ene, nep-ind and nep-reg
References: Add references at CitEc
Citations:

Downloads: (external link)
https://sites.ualberta.ca/~econwps/2021/wp2021-14.pdf Full text (application/pdf)

Related works:
Journal Article: Procurement auctions for regulated retail service contracts in restructured electricity markets (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2021_014

Access Statistics for this paper

More papers in Working Papers from University of Alberta, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Joseph Marchand ().