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William SchulzeDepartment of Applied Economics and Management

Cornell University

wds3@cornell.edu

An Introduction to Electricity Auctions Using PowerWeb Experiments

Power System Engineering Research Center

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OUTLINE

• Part IPart I• Testing Different Types of Auction Using PowerWebTesting Different Types of Auction Using PowerWeb

• Part IIPart II• Testing the Soft-Cap Auction Used in CaliforniaTesting the Soft-Cap Auction Used in California

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PART I

• Testing Different Types of AuctionTesting Different Types of Auction• Uniform Price AuctionUniform Price Auction• Discriminative AuctionDiscriminative Auction

Source:Testing the Performance of Uniform Price and Discriminative Auctions

byTimothy D. Mount, William D. Schulze, Robert J. Thomas, and Ray D. Zimmerman

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PowerWeb Network

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PowerWeb: Offer Submission Page

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PowerWeb: Auction Results

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Uniform Price Auction

• Each supplier submits multiple offers to sell electricity Each supplier submits multiple offers to sell electricity (different quantity/price combinations) into a central auction. (different quantity/price combinations) into a central auction.

• All offers submitted into the auction are ranked from lowest All offers submitted into the auction are ranked from lowest price to highest price.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 The last (highest priced) accepted offer sets the price for all accepted offers.accepted offers.

• Typical offer (supply) curve takes the form of a “hockey stick”.Typical offer (supply) curve takes the form of a “hockey stick”.

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Offers Submitted by Six Firms into a Uniform Price Auction

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Market Prices for a Uniform Price Auction with Price Inelastic Load

(Average Price $76.71/MWh)

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Discriminative Auction

• Each supplier submits multiple offers to sell electricity Each supplier submits multiple offers to sell electricity (different quantity/price combinations) into a central auction. (different quantity/price combinations) into a central auction.

• All offers submitted into the auction are ranked from lowest All offers submitted into the auction are ranked from lowest price to highest price.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 isTypical offer (supply) curve is relatively flat (price elastic).relatively flat (price elastic).

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

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Market Prices for a Discriminative Price Auction with Price Inelastic Load

(Average Price $83.02/MWh)

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Part I: Conclusions

• Prices in the Prices in the Uniform Price AuctionUniform Price Auction are volatile and substantially above competitive are volatile and substantially above competitive levels.levels.

• Prices in the Prices in the Discriminative AuctionDiscriminative Auction are much less volatile but even higher than the are much less volatile but even higher than the average prices in the uniform price auction. average prices in the uniform price auction.

• Prices in the Prices in the Uniform Price AuctionUniform Price Auction are lower with price-responsive load because are lower with price-responsive load because suppliers speculate (submit high offers) with only a few blocks of capacity and the offer suppliers speculate (submit high offers) with only a few blocks of capacity and the offer curve is shaped like a hockey stick. curve is shaped like a hockey stick.

• Prices in the Prices in the Discriminative Price AuctionDiscriminative Price Auction are expected to be relatively insensitive to are expected to be relatively insensitive to price-responsive load because the offer curve is flat (highly price elastic) and suppliersprice-responsive load because the offer curve is flat (highly price elastic) and suppliers speculate with most blocks of capacity.speculate with most blocks of capacity.

• Making load respond to price using a uniform price auction is a more effective way to 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.mitigate high prices than changing to a discriminative auction.

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PART II

Testing the Soft-Cap Auction Testing the Soft-Cap Auction Used in CaliforniaUsed in California

Source:The California Electricity Crisis: An Experimental Investigation

of the Effects of Changing the Market Rulesby

Timothy D. Mount, Robert J. Thomas, Christian A. Vossler and Ray D. Zimmerman

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What Happened in California during What Happened in California during the Winter of 2001?the Winter of 2001?

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100

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300

400

500

600

700

800

1/1/99 4/1/99 7/1/99 10/1/99 1/1/00 4/1/00 7/1/00 10/1/00 1/1/01 4/1/01 7/1/01 10/1/01

$/MWh

P_Cap: $750/MWh

P_Cap: $500/MWh

P_Cap: $250/MWh

S_Cap: $150/MWh

P_Cap: $92.87/MWh

P_Cap: $250/MWh

Figure 1: Spot Prices at Southern California and the Price CapsBlue CAISO Hard CapRed CAISO Soft CapBlack WECC Hard Cap

(Source, Energy Market Report and the CAISO)

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Soft-Cap Auction

• Each supplier submits multiple offers to sell electricity (different Each supplier submits multiple offers to sell electricity (different quantity/price combinations) into a central auction. quantity/price combinations) into a central auction.

• All offers submitted into the auction are ranked from lowest price to All offers submitted into the auction are ranked from lowest price to highest price.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 All offers at or below the soft-cap are paid the last accepted offer (Uniform Price Auction).(Uniform Price Auction).

• Accepted offers above the soft-cap are paid the actual offer Accepted offers above the soft-cap are paid the actual offer (Discriminative Auction).(Discriminative Auction).

• Typical offer (supply) curveTypical offer (supply) curve is ????? is ?????

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Typical Offer (Supply) Curve Discriminative Auction

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Experiment 2: Average Market Price per Period, Student Subjects,Soft-Cap Auction without Price-Responsive Load.

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0 5 10 15 20 25 30 35 40 45 50

Period

Pri

ce

($

/MW

h)

Average Price - StudentsSoft-Cap Auction - Inelastic Load

Dotted line is the “competitive” price (offers equal the true cost)

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Part II: Conclusions

• Prices in the Prices in the Uniform Price AuctionsUniform Price Auctions (Tests 1 & 4) (Tests 1 & 4) drop significantly when generation costs decrease.drop significantly when generation costs decrease.

• Prices in the Prices in the Soft-Cap AuctionsSoft-Cap Auctions (Tests 2 & 3) do NOT (Tests 2 & 3) do NOT drop significantly when generation costs decrease.drop significantly when generation costs decrease.

• Prices in the Prices in the Uniform Price AuctionUniform Price Auction (Tests 4 v 1) are (Tests 4 v 1) are MORE sensitive to lower generation costs with price-MORE sensitive to lower generation costs with price-responsive load.responsive load.

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Why Use PowerWeb to Test Markets?

• Market structures for electricity auctions are Market structures for electricity auctions are too complicatedtoo complicated to derive analytical results.to derive analytical results.

• PowerWeb tests are PowerWeb tests are inexpensiveinexpensive compared to experimenting compared to experimenting directly on the public.directly on the public.

• Paying participantsPaying participants in market tests on the basis of their in market tests on the basis of their performance duplicates market behavior effectively.performance duplicates market behavior effectively.

• The effects of The effects of specific market characteristicsspecific market characteristics can be isolated can be isolated and tested.and tested.

• PowerWeb supports a PowerWeb supports a full AC networkfull AC network, so that the market , so that the market implications of congestion and ancillary services -- as well as implications of congestion and ancillary services -- as well as real power -- can be studied.real power -- can be studied.

• TEST NOW or PAY LATERTEST NOW or PAY LATER