Title

Essays on wholesale auctions in deregulated electricity markets

Date of Completion

January 2007

Keywords

Economics, General|Energy

Degree

Ph.D.

Abstract

The early experience in the restructured electric power markets raised several issues, including price spikes, inefficiency, security, and the overall relationship of market clearing prices to generation costs. Unsatisfactory outcomes in these markets are thought to have resulted in part from strategic generator behaviors encouraged by inappropriate market design features. In this dissertation, I examine the performance of three auction mechanisms for wholesale power markets - Offer Cost Minimization auction, Payment Cost Minimization auction and Simple-Offer auction - when electricity suppliers act strategically. ^ A Payment Cost Minimization auction has been proposed as an alternative to the traditional Offer Cost Minimization auction with the intention to solve the problem of inflated wholesale electricity prices. Efficiency concerns for this proposal were voiced due to insights predicated on the assumption of true production cost revelation. Using a game theoretic approach and an experimental method, I compare the two auctions, strictly controlling for the level of unilateral market power. A specific feature of these complex-offer auctions is that the sellers submit not only the quantities and the minimum prices that they are willing to sell at, but also the start-up fees, which are designed to reimburse the fixed start-up costs of the generation plants. I find that the complex structure of the offers leaves considerable room for strategic behavior, which consequently leads to anti-competitive and inefficient market outcomes.^ In the last chapter of my dissertation, I use laboratory experiments to contrast the performance of two complex-offer auctions against the performance of a simple-offer auction, in which the sellers have to recover all their generation costs - fixed and variable - through a uniform market-clearing price. I find that a simple-offer auction significantly reduces consumer prices and lowers price volatility. It mitigates anti-competitive effects that are present in the complex-offer auctions and achieves allocative efficiency more quickly.^