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Electricity Auctions
Author(s) -
Léautier ThomasOlivier
Publication year - 2001
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.2001.00331.x
Subject(s) - common value auction , unavailability , economic rent , electricity , economics , yield (engineering) , microeconomics , transmission (telecommunications) , industrial organization , business , computer science , telecommunications , engineering , materials science , electrical engineering , reliability engineering , metallurgy
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.