Evaluating capacity auction design for electricity: An experimental analysis

Despina  Yiakoumia; Agathe Rouaix; Euan Phimister

doi:10.1016/j.eneco.2022.106370

Evaluating capacity auction design for electricity: An experimental analysis

Despina Yiakoumia^* (Corresponding Author), Agathe Rouaix, Euan Phimister^* (Corresponding Author)

^*Corresponding author for this work

The Cyprus Institute

Research output: Contribution to journal › Article › peer-review

Abstract

This paper considers the design of multi-unit procurement auctions relevant for electricity capacity markets drawing on the structure of the market introduced in Great Britain. Simple games are used to generate predictions about the impact of information feedback between auction rounds and the shape of the demand curve. These predictions are used as benchmarks and tested using a series of
economic experiments. The results show that participants recognize their own and their opponents’ market power opportunities, raising clearing prices and lowering allocative efficiency. No information feedback between rounds reduces average clearing prices and the risk of not achieving the supply target but also typically reduces allocative efficiency. A downward sloping step-demand function leads to competitive prices no matter what the level of feedback is but not necessarily to allocative efficiency. It also significantly increases the risk of not achieving the target level of supply.

Original language	English
Article number	106370
Number of pages	20
Journal	Energy Economics
Volume	115
Early online date	21 Oct 2022
DOIs	https://doi.org/10.1016/j.eneco.2022.106370
Publication status	Published - 4 Nov 2022

Bibliographical note

Acknowledgement: Research funds for this work were provided by a PhD scholarship co-funded by the Energy Technology Partnership (ETP), the Scottish Government and the University of Aberdeen. We would like also to thank the late Professor Joseph (Joe) E. Swierzbinski who was an inspiration for this work. He is sorely missed. We would also like to thank the referees for their helpful comments. All usual caveats apply.

Keywords

Capacity auction design
Clock auction
Experimental economics
Market design
Market power

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Cite this

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title = "Evaluating capacity auction design for electricity: An experimental analysis ",

abstract = "This paper considers the design of multi-unit procurement auctions relevant for electricity capacity markets drawing on the structure of the market introduced in Great Britain. Simple games are used to generate predictions about the impact of information feedback between auction rounds and the shape of the demand curve. These predictions are used as benchmarks and tested using a series ofeconomic experiments. The results show that participants recognize their own and their opponents{\textquoteright} market power opportunities, raising clearing prices and lowering allocative efficiency. No information feedback between rounds reduces average clearing prices and the risk of not achieving the supply target but also typically reduces allocative efficiency. A downward sloping step-demand function leads to competitive prices no matter what the level of feedback is but not necessarily to allocative efficiency. It also significantly increases the risk of not achieving the target level of supply.",

keywords = "Capacity auction design, Clock auction, Experimental economics, Market design, Market power",

author = "Despina Yiakoumia and Agathe Rouaix and Euan Phimister",

note = "Acknowledgement: Research funds for this work were provided by a PhD scholarship co-funded by the Energy Technology Partnership (ETP), the Scottish Government and the University of Aberdeen. We would like also to thank the late Professor Joseph (Joe) E. Swierzbinski who was an inspiration for this work. He is sorely missed. We would also like to thank the referees for their helpful comments. All usual caveats apply. ",

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doi = "10.1016/j.eneco.2022.106370",

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AU - Rouaix, Agathe

AU - Phimister, Euan

N1 - Acknowledgement: Research funds for this work were provided by a PhD scholarship co-funded by the Energy Technology Partnership (ETP), the Scottish Government and the University of Aberdeen. We would like also to thank the late Professor Joseph (Joe) E. Swierzbinski who was an inspiration for this work. He is sorely missed. We would also like to thank the referees for their helpful comments. All usual caveats apply.

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N2 - This paper considers the design of multi-unit procurement auctions relevant for electricity capacity markets drawing on the structure of the market introduced in Great Britain. Simple games are used to generate predictions about the impact of information feedback between auction rounds and the shape of the demand curve. These predictions are used as benchmarks and tested using a series ofeconomic experiments. The results show that participants recognize their own and their opponents’ market power opportunities, raising clearing prices and lowering allocative efficiency. No information feedback between rounds reduces average clearing prices and the risk of not achieving the supply target but also typically reduces allocative efficiency. A downward sloping step-demand function leads to competitive prices no matter what the level of feedback is but not necessarily to allocative efficiency. It also significantly increases the risk of not achieving the target level of supply.

AB - This paper considers the design of multi-unit procurement auctions relevant for electricity capacity markets drawing on the structure of the market introduced in Great Britain. Simple games are used to generate predictions about the impact of information feedback between auction rounds and the shape of the demand curve. These predictions are used as benchmarks and tested using a series ofeconomic experiments. The results show that participants recognize their own and their opponents’ market power opportunities, raising clearing prices and lowering allocative efficiency. No information feedback between rounds reduces average clearing prices and the risk of not achieving the supply target but also typically reduces allocative efficiency. A downward sloping step-demand function leads to competitive prices no matter what the level of feedback is but not necessarily to allocative efficiency. It also significantly increases the risk of not achieving the target level of supply.

KW - Capacity auction design

KW - Clock auction

KW - Experimental economics

KW - Market design

KW - Market power

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JO - Energy Economics

JF - Energy Economics

M1 - 106370

ER -

Evaluating capacity auction design for electricity: An experimental analysis

Abstract

Bibliographical note

Keywords

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