1 William Schulze Department of Applied Economics and Management Cornell University An Introduction to Electricity Auctions Using PowerWeb Experiments Power System Engineering Research Center

2 OUTLINE Part I Part I Testing Different Types of Auction Using PowerWeb Testing Different Types of Auction Using PowerWeb Part II Part II Testing the Soft-Cap Auction Used in California Testing the Soft-Cap Auction Used in California

3 PART I Testing Different Types of Auction Testing Different Types of Auction Uniform Price Auction Uniform Price Auction Discriminative Auction Discriminative Auction Source: Testing the Performance of Uniform Price and Discriminative Auctions by Timothy D. Mount, William D. Schulze, Robert J. Thomas, and Ray D. Zimmerman

4 PowerWeb Network

5 PowerWeb: Offer Submission Page

6 PowerWeb: Auction Results

7 Uniform Price Auction Each supplier submits multiple offers to sell electricity (different quantity/price combinations) into a central auction. Each supplier submits multiple offers to sell electricity (different quantity/price combinations) into a central auction. All offers submitted into the auction are ranked from lowest price to highest price. All offers submitted into the auction are ranked from lowest price to highest price. Select the lowest priced offers until supply equals demand. Select the lowest priced offers until supply equals demand. The last (highest priced) accepted offer sets the price for all accepted offers. The last (highest priced) accepted offer sets the price for all accepted offers. Typical offer (supply) curve takes the form of a hockey stick. Typical offer (supply) curve takes the form of a hockey stick.

8 Offers Submitted by Six Firms into a Uniform Price Auction

9 Market Prices for a Uniform Price Auction with Price Inelastic Load (Average Price $76.71/MWh)

10 Discriminative Auction Each supplier submits multiple offers to sell electricity (different quantity/price combinations) into a central auction. Each supplier submits multiple offers to sell electricity (different quantity/price combinations) into a central auction. All offers submitted into the auction are ranked from lowest price to highest price. All offers submitted into the auction are ranked from lowest price to highest price. Select the lowest priced offers until supply equals demand. Select the lowest priced offers until supply equals demand. Each accepted offer is paid the offered price. Each accepted offer is paid the offered price. Typical offer (supply) curve is relatively flat (price elastic). Typical offer (supply) curve is relatively flat (price elastic).

11 What Happens if Firms are Paid Their Offers (Discriminative Auction)?

12 Market Prices for a Discriminative Price Auction with Price Inelastic Load (Average Price $83.02/MWh)

13 Part I: Conclusions Prices in the Uniform Price Auction are volatile and substantially above competitive levels. Prices in the Uniform Price Auction are volatile and substantially above competitive levels. Prices in the Discriminative Auction are much less volatile but even higher than the average prices in the uniform price auction. Prices in the Discriminative Auction are much less volatile but even higher than the average prices in the uniform price auction. Prices in the Uniform Price Auction are lower with price-responsive load because suppliers speculate (submit high offers) with only a few blocks of capacity and the offer curve is shaped like a hockey stick. Prices in the Uniform Price Auction are lower with price-responsive load because suppliers speculate (submit high offers) with only a few blocks of capacity and the offer curve is shaped like a hockey stick. Prices in the Discriminative Price Auction are expected to be relatively insensitive to price-responsive load because the offer curve is flat (highly price elastic) and suppliers speculate with most blocks of capacity. Prices in the Discriminative Price Auction are expected to be relatively insensitive to price-responsive load because the offer curve is flat (highly price elastic) and suppliers speculate with most blocks of capacity. Making load respond to price using a uniform price auction is a more effective way to mitigate high prices than changing to a discriminative auction. Making load respond to price using a uniform price auction is a more effective way to mitigate high prices than changing to a discriminative auction.

14 PART II Testing the Soft-Cap Auction Used in California Source: The California Electricity Crisis: An Experimental Investigation of the Effects of Changing the Market Rules by Timothy D. Mount, Robert J. Thomas, Christian A. Vossler and Ray D. Zimmerman

15 What Happened in California during the Winter of 2001?

16 Soft-Cap Auction Each supplier submits multiple offers to sell electricity (different quantity/price combinations) into a central auction. Each supplier submits multiple offers to sell electricity (different quantity/price combinations) into a central auction. All offers submitted into the auction are ranked from lowest price to highest price. All offers submitted into the auction are ranked from lowest price to highest price. Select the lowest priced offers until supply equals demand. Select the lowest priced offers until supply equals demand. All offers at or below the soft-cap are paid the last accepted offer (Uniform Price Auction). All offers at or below the soft-cap are paid the last accepted offer (Uniform Price Auction). Accepted offers above the soft-cap are paid the actual offer (Discriminative Auction). Accepted offers above the soft-cap are paid the actual offer (Discriminative Auction). Typical offer (supply) curve is ????? Typical offer (supply) curve is ?????

17 Typical Offer (Supply) Curve Discriminative Auction

18 Average Price - Students Soft-Cap Auction - Inelastic Load Dotted line is the competitive price (offers equal the true cost)

19 Part II: Conclusions Prices in the Uniform Price Auctions (Tests 1 & 4) drop significantly when generation costs decrease. Prices in the Uniform Price Auctions (Tests 1 & 4) drop significantly when generation costs decrease. Prices in the Soft-Cap Auctions (Tests 2 & 3) do NOT drop significantly when generation costs decrease. Prices in the Soft-Cap Auctions (Tests 2 & 3) do NOT drop significantly when generation costs decrease. Prices in the Uniform Price Auction (Tests 4 v 1) are MORE sensitive to lower generation costs with price- responsive load. Prices in the Uniform Price Auction (Tests 4 v 1) are MORE sensitive to lower generation costs with price- responsive load.

20 Why Use PowerWeb to Test Markets? Market structures for electricity auctions are too complicated to derive analytical results. Market structures for electricity auctions are too complicated to derive analytical results. PowerWeb tests are inexpensive compared to experimenting directly on the public. PowerWeb tests are inexpensive compared to experimenting directly on the public. Paying participants in market tests on the basis of their performance duplicates market behavior effectively. Paying participants in market tests on the basis of their performance duplicates market behavior effectively. The effects of specific market characteristics can be isolated and tested. The effects of specific market characteristics can be isolated and tested. PowerWeb supports a full AC network, so that the market implications of congestion and ancillary services -- as well as real power -- can be studied. PowerWeb supports a full AC network, so that the market implications of congestion and ancillary services -- as well as real power -- can be studied. TEST NOW or PAY LATER TEST NOW or PAY LATER