Procurement auctions for regulated retail service contracts in restructured electricity markets

Abstract

A challenge in setting regulated rates for default retail electricity products is the presence of both price and quantity uncertainty faced by the default retail provider. To address this challenge, regulators have been increasingly employing competition via full-load (load-following) auctions to value the costs associated with this uncertainty. In a full-load auction, firms bid to supply a fixed percentage of the regulated utility’s hourly demand at a fixed price. In this paper, we develop a model of break-even pricing of electricity forward products. We use this model to evaluate the performance of full-load auctions in Alberta, where the largest regulated retail provider adopted such auctions in December 2018. We find that the winning full-load bids exceed break-even levels, but that the difference falls over time. This reduction coincides with an increase in the number of bidders active in the full-load auctions. Our paper highlights the importance of sufficient participation for the success of full-load auctions and the potential role for competitive markets in determining the value of risk faced by regulated retail providers.