An Experimental Study of Complex-Offer Auctions from Wholesale Energy Markets

Abstract

A Payment Cost Minimization auction has been proposed as an alternative to the Offer Cost Minimization auction for use in wholesale electric power markets with an intention to lower procurement cost of electricity. Efficiency concerns have been raised for this proposal while assuming that the true production costs would be revealed to the auctioneer in a competitive market. Using an experimental approach, the study compares the performance of these two complex-offer auctions, controlling for the level of unilateral market power. The analysis finds that neither auction results in allocations that correspond to the true cost revelation. Two auctions perform similarly in terms of procurement cost and efficiency. Surprisingly, consumer prices in a competitive environment approach the prices of an environment with market power. It appears that the expected institutional effects for procurement cost and efficiency are greatly dominated by the effects of anti-competitive behavior due to the offer complexity and a cyclical nature of market demand.

Keywords: Avoidable Fixed Cost, Complex-Offer Auction, Cyclical Demand, Efficiency, Electricity, Two-Part Pricing

JEL Classification: C72, D4, D61, L94