Pay-as-Bid versus Marginal Pricing—Part I: Strategic Generator Offers

Abstract

As the arguments for and against the use of pay-as-bid (PAB) or marginal pricing (MP) in electricity pools tend to be qualitative, we compare the quantitative behavior of the two markets assuming that generators submit the best strategic offers that correspond to the specified pricing method. In Part I of this two-part study, assuming that the system marginal costs for PAB and MP are random with known probability density functions, we develop generator strategic offers by maximizing the corresponding expected values of the generator profits over the offer parameters. In Part II relations are established between the SMCs for each market type and a common random demand, thus allowing the two markets to be compared through the expected values and variances of the individual generation profits and of the consumer payments. This comparison demonstrates both theoretically and through simulation that: 1) the expected values of the individual generator profits as well as of the consumer payments are the same under MP and PAB and 2) the variances of the individual generator profits and of the consumer payments however are larger under MP than under PAB. The primary conclusion is then that although MP and PAB yield identical expected generator profits and consumer payments, the risk of not meeting these expected values is greater under MP than under PAB.