Implicit Auctions Research Articles

Competitive effects of implicit auction on interconnectors: evidence from Japan

Interconnectors play a crucial role in electric power systems. They contribute to balancing demand and supply in real-time, guaranteeing efficient dispatch in wide geographic regions, and increasing competition by creating large markets. However, interconnector capacity is a scarce resource because vertically integrated utilities were required to have generating capacity enough to supply most customers within their operating region under a regulated monopoly. Hence, identifying the efficient allocation method is essential, particularly after recent electricity market restructuring. This study evaluates the competitive effect of the implicit auction on the interconnector transmission capacity. The implicit auction allocates all the interconnector capacity simultaneously with electric energy in the day-ahead market. This method prevents market participants from strategically withholding the physical interconnector capacity ex ante to exercise market power, as allowed under the first come, first served rule. This study empirically shows how the capacity was withheld from the day-ahead market under the first come, first served rule using detailed reservation data. Next, I show that the implicit auction increases interconnector capacity available at the day-ahead market and trade volume. I use machine-learning methods, such as random forest and deep neural networks, to predict the counterfactual market outcomes without implicit auction. I find that the gain from trade under the implicit auction is more than US$55 million per year in Japan, which is more than 100 times the implementation cost of the implicit auction.

Welfare Effects of Implicit Auction on Interconnector Capacity: Evidence from Japan

Welfare Effects of Implicit Auction on Interconnector Capacity: Evidence from Japan

Utilization of cross-regional interconnector and pumped hydro energy storage for further introduction of solar PV in Japan

The amount of solar PV installed capacity has steadily increased to 44.5 GW at the end of FY2017, since the introduction of the Feed in Tariff (FiT) to Japan in 2012. On the other hand, since the first curtailment of solar PV was conducted on October 13th, 2018 in the Kyushu area, the curtailment has been frequently executed including wind power after that. In this study, cross-regional interconnector and pumped hydro energy storage (PHES) are focused on mitigating curtailment.In Japan, there are 9 electric power areas which connected each other by cross-regional interconnectors. According to the historical operation, cross-regional interconnectors were secured as emergency flexible measures, but after the implicit auction was started from October 2018, it is used on merit order. Regarding a PHES in Japan, they have been built with nuclear power plants for several decades. Because the output of nuclear power generation is constant, so the PHES is used to absorb the surplus at nighttime when the demand declines. All nuclear power plants in Japan have been shut down after the accident at the Fukushima Daiichi Nuclear Power Plant following the Great East Japan Earthquake that occurred on March 11th, 2011. There are several nuclear power plants that have been restarted (9 reactors, as of August 2019).In this study, the amount of curtailment for solar PV in the Kyushu area is sent to the Chugoku area using the cross-regional interconnector (Kanmon line). Then, the PHES in the Chugoku area is pumping with low price. Because the spot price in the market is low when the curtailment is executed. After that, the PHES is generating at night with high price when the solar PV is not generating. It makes a profit by the deference for the cost of pumping and the revenue of generating by the PHES. As a calculation result, for one week from May 2nd to 8th, 2019, a profit becomes 152.2 million JPY (about 1.22 million EUR). For this purpose, it is necessary to raise the operation capacity of the cross-regional interconnector up to the rated capacity with the frequency control function of solar PV instead of the capacity to keep frequency in the event of an accident. This will allow the further introduction of solar PV in Japan.

Dynamic Spatial Equilibrium Models: an Application to the Natural Gas Spot Markets

European gas markets have gone through profound restructuring processes in the last 20 years. Directive 98/30/EC represented the first attempt to liberalize this market through the unbundling of gas supply and generation from the operation of transmission networks. The goal of this Directive was the creation of an internal market for gas by breaking up vertically integrated national companies. This commitment to integrate the European gas market was strengthened by Directive 2003/55/EC few years later and then confirmed by the Gas Target Model in 2011. This progressively increasing competition of the European gas market implies significant changes in the pricing system. In particular, it has been envisaged that long-term contracts, traditionally used to trade gas in Europe, could be partially substituted by short-term transactions operated in (liquid) spot markets, possibly organized as implicit auctions. Considering this framework, we investigate the problem of managing a dynamic system of spatially distributed spot markets where gas is traded on an auction basis. These markets are cleared taking into account transmissions, balance, and storage constraints. We propose a set of equilibrium type conditions for this system of markets and show that it is equivalent to a single-level variational inequality problem. In order to find its solution, which yields an equilibrium trajectory, we apply a dual type method. Numerical experiments are conducted on the gas spot markets developed in the Netherlands and in the United Kingdom.

Delivering electricity market insights in Northern Italy

This paper assesses the robustness and predictive power of a model comprising a complete set of variables affecting the electricity prices in Northern Italy. The Italian market is based on an implicit auction mechanism via six zonal prices, whose weighted average derives the System Marginal Price, or Prezzo Unico Nazionale (PUN). Given the focus on Northern Italy, as the country’s industrial core and main demand center, this work considers an exhaustive set of exogenous variables affecting a specific market zone, i.e. the North Zone. The import from bordering countries and market zones, the impact of non-programmable renewables, the load factor, the weather data and the prices of underlying commodities have been included. The econometric modelling of an ARMAX process for North Zone prices results in an under performance compared to a standard ARMA, to be fine-tuned, with potential implications regarding the reliance on timely adjustments on market information at trading floor level.

The Impact of Implicit Electricity Market Coupling on the Slovenian-Austrian Border on the Efficiency of Cross-Border Transmission Capacity Allocation and Social Welfare in Slovenia

On the Slovenian-Austrian border cross-zonal capacities (CZCs) are currently allocated at explicit auctions, although in the future to comply with the European Target Electricity Model one can expect implicit auctions within market coupling to be implemented. Via a simulation, this paper aims to study the impact of implicit electricity market coupling on the Slovenian-Austrian border on the efficiency of CZC allocation and social welfare in Slovenia. The simulation results show that the use of implicit auctions would increase the efficiency of CZC allocation, reduce the price of electricity and increase the volume of trading in the Slovenian electricity exchange market. Further, implicit market coupling on the Slovenian-Austrian border would increase social welfare in Slovenia. DOI: 10.15458/85451.47

Market Coupling in Electricity Markets: Status Quo and Future Challenges

In electricity markets globally, market participants and policymakers increasingly focus on integrating adjacent, yet separate market areas via cross-border trade in electricity. Based on a discussion of the institutional framework for organizing cross-border trade, this chapter analyzes how spot and futures prices for wholesale electricity are affected by different degrees of market integration. We first contrast the two main mechanisms to allocate transmission capacity between neighboring markets: explicit and implicit auctions. Subsequently, we study the impact of these allocation schemes on the empirical price dynamics of major electricity markets in Europe. Our empirical analysis thereby confirms that under market coupling, economically inefficient cross-border flows in the wrong direction can be avoided. From a policy point of view, however, we show that further market integration can be hindered by individual energy market regulation on a national level, which may be opposed to supra-national frameworks such as market coupling.

Estimating welfare losses and gains in explicit auctions for power trade: an application to the Italian case

Cross-border transmission capacities in Europe have been traditionally allocated via explicit auctions. As these will be replaced by implicit auctions, a relevant question regards the impact of this major transition on expected gains in social welfare. In this paper we study, first, the equations that describe the welfare loss associated with a suboptimal use of the transmission capacity. Second, by examining how suboptimal flows, and particularly adverse flows, change with the introduction of implicit auctions, we derive an original procedure that improves the accuracy of the welfare loss estimation when available market data are limited. Finally, we apply the proposed procedure to data pertaining to the Italian market and verify that for a net importer, such as Italy, the procedure derived in this work is particularly helpful in providing more accurate estimations of the welfare losses associated with explicit auctions. As implicit auctioning will eliminate these welfare losses, we interpret our results as a measure of the benefits associated with the current transition for the Italian market and use them to derive some more general implications.

Coordinating Cross-Border Congestion Management Through Auctions: An Experimental Approach to European Solutions

Competition among producers within an integrated electricity system is impeded by any limited transmission capacity there may be at its borders. Two alternative market mechanisms have recently been designed to organize the allocation of scarce transmission capacity at cross-border level: the 'implicit auction', already used in some countries, and the 'coordinated explicit auction', proposed by the European Transmission System Operators (ETSO) but not implemented yet. The main advantage of the explicit auction is that it allows each country to keep its own power exchange running. In the European institutional context, this is seen as a factor of success of a market reform, although the explicit auction (not coordinated) is known to be less efficient than the implicit mechanism. The addition of a coordination dimension in the explicit auction is intended to solve problems of international flows. We use an experimental methodology to identify and compare in a laboratory setting the efficiency properties of these two market mechanisms, given a market structure similar to the existing one in continental Europe, i.e. a competitive oligopoly. Our main result highlights the inefficiency of the coordinated explicit auction compared to the performance of the implicit auction, measured in terms of both energy prices and transmission capacity allocation. We suggest that the poor performance of the coordinated explicit auction in the laboratory is due to the level of individual expectations about both energy and transmission prices that the mechanism demands. One solution to resolve this problem when the mechanism is implemented in the field would be to design an additional and secondary market for 'used' transmission capacity.

Coordinating cross-border congestion management through auctions: An experimental approach to European solutions

Competition among producers within an integrated electricity system is impeded by any limited transmission capacity there may be at its borders. Two alternative market mechanisms have recently been designed to organize the allocation of scarce transmission capacity at cross-border level: (i) the “implicit auction”, already used in some countries, and (ii) the “coordinated explicit auction”, proposed by the European Transmission System Operators (ETSO) but not yet implemented. The main advantage of the explicit auction is that it allows each country to keep its own power exchange running. In the European institutional context, this is seen as a factor of success of a market reform, although the explicit auction (not coordinated) is known to be less efficient than the implicit mechanism. The addition of a coordination dimension in the explicit auction is intended to solve problems of international flows. We use the experimental methodology to identify and compare in a laboratory setting the efficiency properties of these two market mechanisms, given a market structure similar to the existing one in continental Europe, i.e. a competitive oligopoly. Our main result highlights the inefficiency of the coordinated explicit auction compared to the performance of the implicit auction, measured in terms of both energy prices and transmission capacity allocation. We suggest that the poor performance of the coordinated explicit auction in the laboratory is due to the level of individual expectations about both energy and transmission prices that the mechanism demands. One solution to resolve this problem when the mechanism is implemented in the field would be to design an additional and secondary market for “used” transmission capacity.

Implicit auctioning on the Kontek Cable: Third time lucky?

Implicit auctioning in Europe is about eliminating cross-border trade inefficiencies by internalizing cross-border trade into the day-ahead auction procedures of the Power Exchanges that are already organizing trade nationally. On the Kontek Cable, implicit auctioning has first been implemented with “no coupling” between the relevant Power Exchanges, followed by a “volume coupling” implementation, and finally a “one way price coupling” implementation that is still operational today. The main contribution of this paper is to compare the theoretical properties of these three implementations and to analyze their performance empirically. We find that the third implementation is significantly outperforming the previous two implementations, but in this third implementation stakeholders partly abandoned the “volume coupling” approach they initially believed to be a viable alternative and institutionally easier to implement.

Market Coupling and the CWE Project

The article copes with the ongoing effort to establish implicit auctions to allocate transmission capacity on cross-border interconnectors in the power grid. By the means of implicit auctions (in contrast to explicit auctions), cross-border capacities are included in the clearing of local power exchanges. Concerning the day ahead auction, ‘market coupling’ plays an important role. Market coupling connects (formerly often national) electricity markets, simplifying cross-border trade. One of the main drivers of market coupling projects is the pursuit of European market integration i.e. allowing for convenient cross-border trade. The other reason is the perception that explicit auctions of transmission capacity (in addition to energy auctions which are often performed later) do sometimes lead to sub-optimal results. The objective function of market coupling is the maximisation of total welfare of all connected markets. Further to the explanation of different market coupling models (also regarding capacity calculation), the current development in Europe is wrapped up—including the CWE market coupling (Central Western Europe) project. The CWE market coupling is announced to start in fall 2010, coupling the day-ahead electricity markets of Belgium, France, Germany, Luxembourg and the Netherlands.

Market coupling and the importance of price coordination between power exchanges

In Europe, market coupling stands for a further integration of wholesale trading arrangements across country borders. More specifically, it refers to the implicit auctioning of cross-border physical transmission rights via the hourly auctions for electric energy organized by power exchanges (PEXs) one day ahead of delivery. It therefore implies that the PEXs can optimize the clearing of their day-ahead auctions. Due to verticals in the aggregated order curves, the optimal solution can be settled at different prices. In order for prices to give correct locational signals for network development, generation and consumption, price coordination between exchanges is necessary. The paper illustrates this issue, its relevance and discusses how to deal with it.

Electricity prices and cross-border trade: Volume and strategy effects

In this paper we derive equilibrium bid functions in isolated domestic electricity markets and then analyse their modifications when cross-border trade among them is managed using the implicit auction method. We show that cross-border trade can induce price convergence across countries and thereby reallocate gains and losses as a result of two concomitant effects: a “volume” effect due to the mere increase/decrease of demand and supply in each market and a “bid effect” due to the modifications of bid functions brought about by interconnection. The latter effect can either contrast or reinforce the former. We derive conditions affecting the net result.