Competition in Electricity Forward-Contract Auctions

Abstract

Brazil, Chile and other developing countries have recently experienced with forward or long-run contract auctions for electricity demand, to meet supply adequacy problems. In this paper, we analyze what it requires to have a competitive auction process for this type of contracts when each bidder can't fully meet the entire demand. Our findings suggest that a large number of bidders are not enough warranty for fierce competition. Electricity forward-contract auctions may be uncompetitive, even if they have lots of bidders but with low power-generating capacity for contracting. For practical auction design, we found that encouraging more bidders' entry in the auction results in lower expected prices than increasing existing bidders' offer capacity. We also found that encouraging more bidders' entry or increasing existing bidders' offer capacity have a similar decreasing effect on the likelihood of collusion in infinitely repeated auctions. Encouraging entry could be a preferred strategy, because it also increases the likelihood of low cost bidders, which require a higher discount factor to participate in a collusive agreement. Investment decisions remains optimal, as in Arellano and Serra (2010), if they are taken after every auction.