A large generator's bids in an electricity supply auction: Uniform pricing versus pay‐as‐bid pricing

Abstract

AbstractA pay‐as‐bid auction has been adopted in a balancing market under New Electricity Trading Arrangements in England and Wales since 2001 instead of a uniform price auction previously used in a day‐ahead pool market. In contrast, a spot market in Japan, where a general electric utility would be the main supplier, plans to employ a uniform price auction. In this paper we model an electricity spot market in which one large generator competes with many fringe generators to supply electricity, analyze how this large generator bids to maximize its profits, and report some implications for the design of this market. Three types of auction are analyzed: a highest‐winning‐bid pricing (HWB) uniform price auction, a lowest‐losing‐bid pricing (LLB) uniform price auction, and a pay‐as‐bid auction. It is shown that the slope of the bid curve, which is obtained by plotting the large generator's bidding prices against its generation costs, are steeper in an LLB uniform price auction and flatter in a pay‐as‐bid auction than those in an HWB uniform price auction. This implies that an LLB uniform price auction or a pay‐as‐bid auction would make room for the fringe generators to win an auction. © 2007 Wiley Periodicals, Inc. Electr Eng Jpn, 160(4): 41–48, 2007; Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/eej.20420