Evaluating capacity auction design for electricity: An experimental analysis

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.