Market Design

Find papers and presentations on all market design topics;

Capacity Markets, Competitive Market Models, ELMP, Financial Transmission Rights, investment incentives, lessons from abroad, lessons from other industries, LMP, price formation, regional transmission organizations, retail pricing, and. scarcity pricing.

 

Capacity Markets

Kelly, John. “Dynamic Pricing.” In, 2016.Abstract
Kelly, John. Dynamic Pricing." Presentation to the Harvard Electricity Policy Group's 83rd Plenary Session. Cambridge, MA, June 2, 2016."
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Competitive Market Models

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Financial Transmission Rights

Investment Incentives

Lessons from Abroad

Moen, Jan. “Regional Initiative: Which Appropriate Market Design?” In, 2009.Abstract

Moen, Jan. Regional Initiative: Which Appropriate Market Design? European University Institute, Robert Schuman Center for Advanced Studies, Florence School of Regulation. November, 2009. 44 pages.

 

The European Union has a long experience and many success stories when it comes both to build a borderless Europe and to ensure that benefits are fairly distributed among producers and end-use customers. In some sectors results and benefits arise quickly, but sometimes borders remain difficult to cross despite numerous initiatives. A typical example of this is the completion of the single market for electricity. The process has been ongoing since the early 1990s and major progress has been made. However, we are still far from a borderless and truly competitive electricity market across Europe. A new legislative framework, the Third Package, will enter into force shortly and yield strong expectations. However, growing concerns become apparent among policy makers and in the market place on its ability to effectively foster the completion of the internal market and tackle market power issues. This paper argues that the approach adopted in the Third Package is not adapted to the challenges the European Union faces in electricity. The current lack of focus on implementing a better market design architecture leads the EU regulatory framework to overlooks important issues such as the promotion of power exchanges. The paper reviews the current state of the art on ‘smart’ market design in the economic literature and confronts it with the concrete experiences pursued at the regional level, in the European Union and beyond. Some of the issues discussed in depth include the TSOs’ roles and institutional design, generation adequacy and the design of capacity mechanisms and the development of demand-side response programs. It shows that the EU should learn from some of the on-going initiatives pursued at the domestic and regional level and that a sound market design based on a pool/TSO central dispatch is probably the way forward.

 

Anderson, Edward J. “Mixed Strategies in Discriminatory Divisible-good Auctions.” In, 2009.Abstract

Anderson, Edward J. , Pr Holmberg and Andrew B. Philpott. Mixed Strategies in Discriminatory Divisible-good Auctions. IFN Working Paper No. 814, 2009. 72 pages.

Using the concept of market-distribution functions, we derive general optimality conditions for discriminatory divisible-good auctions, which are also applicable to Bertrand games and non-linear pricing. We introduce the concept of offer distribution function to analyze randomized offer curves, and characterize mixed-strategy Nash equilibria for pay-as-bid auctions where demand is uncertain and costs are common knowledge; a setting for which pure-strategy supply function equilibria typically do not exist. We generalize previous results on mixtures over horizontal offers as in Bertrand-Edgeworth games, but more importantly we characterize novel mixtures over partly increasing supply functions.

 

 

Fabra, Natalia, Nils-Hendrik von der Fehr, and David Harbord. “Designing Electricity Auctions: Uniform, Discriminatory and Vickrey.” In, 2002.Abstract

Fabra, Natalia, Nils-Hendrik von der Fehr and David Harbord. Designing Electricity Auctions: Uniform, Discriminatory and Vickrey. 9 November 2002. Paper, 37 pages.

Motivated by the new auction format introduced in the England and Wales electricity market and the recent debate in California, we charac- terize bidding behavior and market outcomes in uniform, discriminatory and Vickrey electricity auctions. The aim is to gain an improved under- standing of how different auction formats affect the degree of competition and overall welfare in decentralized electricity markets. We find that the uniform auction is (weakly) outperformed in consumer surplus terms by the discriminatory auction, but that uniform auctions are (weakly) more efficient. Vickrey auctions guarantee productive efficiency, but at the expense of large payments to firms. The overall welfare ranking of the auctions is thus ambiguous. The paper also clarifies some methodological issues in the analysis of electricity auctions. In particular we show that analogies with continuous share auctions are misplaced so long as firms are restricted to a finite number of bids. We also provide a characterization of multi-unit Vickrey auctions with reserve pricing.

 

 

Regional Transmission Organizations (RTO)

Ludwigson, Jon. “Oversight of RTO's.” In, 2008.Abstract
Ludwigson, Jon. Oversight of RTO's. Presentation to the Harvard Electricity Policy Group 53rd Plenary Session, December 11, 2008. 13 pages.
Leuthold, Florian, Ina Rumiantseva Hannes Weigt Till Jeske, and Christian von Hirschhausen. “Nodal Pricing in the German Electricity Sector – A Welfare Economics Analysis, with Particular Reference to Implementing Offshore Wind Capacities.” In, 2005.Abstract
Leuthold, Florian, Ina Rumiantseva, Hannes Weigt, Till Jeske and Christian von Hirschhausen. Nodal Pricing in the German Electricity Sector – A Welfare Economics Analysis, with Particular Reference to Implementing Offshore Wind Capacities. September 2005. Paper, 33 pages.

Retail Pricing

Scarcity Pricing

Hogan, William W. Priorities for the Evolution of an Energy-Only Electricity Market Design in ERCOT, 2017.Abstract

Electricity markets employ open access and non‐discrimination to foster competition, market entry, and innovation. The physical characteristics of the electricity system require explicit consideration of key elements in electricity market design. Pricing and settlement rules for the real‐time market must provide efficient incentives, both for short‐term operations and long‐run investment. The ERCOT energy‐only market design emphasizes the need to get the real‐time prices right. The recent innovation of the ERCOT Operating Reserve Demand Curve (ORDC) addressed the fundamental problem of inadequate region‐wide scarcity pricing that has plagued other organized markets, which have exhibited inadequate incentives both for reliable operations and efficient investment.

ERCOT employs an open wholesale electricity market as the basis for short‐term reliable electricity supply as well as for long‐term investments to maintain reliability in the future. A review of energy price formation in ERCOT leads to two important conclusions: (i) while the ORDC is performing consistently within its design, scarcity price formation is being adversely influenced by factors not contemplated by the ORDC; (ii) other aspects of the ERCOT market design must be improved to better maintain private market response to energy prices as the driver of resource investment, maintenance expenditure and retirement decisions.

The paper identifies three general issues that have affected ERCOT energy prices in recent years, and recommends policy and price formation improvements consistent with efficient market design. These recommendations cannot reverse the impact of broader economic trends, such as low natural gas prices, or national policies, such as subsidies for investments in renewable resources. However, the stress of these forces has exposed areas where there is a need for adjustments to pricing rules and policies within ERCOT.

System‐wide Price Formation

• Marginal Losses:The efficiency of region‐wide prices in ERCOT is distorted by the omission of the marginal cost of transmission losses from ERCOT’s energy market dispatch and pricing.

• ORDC Enhancements: The system‐wide ORDC calculation should be enhanced to address the reliability impacts of changes in the generation supply mix and the price impacts of reliability.

 Locational Scarcity Pricing

• Out‐of‐Market Actions to Manage Transmission Constraints: Local scarcity pricing and mitigation rules require changes to properly set prices when there are reliability unit commitments or other ERCOT reliability actions to manage transmission constraints; these changes should not disable rules for local market power mitigation.

• Dispatch and Pricing for Local Reserve Scarcity: Introduction of local reserve requirements, implemented through co‐optimization of the energy dispatch and reserve schedules, would provide a market solution to properly set prices when there are constraints on reserve availability in a sub‐region.

Transmission Planning and Cost Recovery

• Transmission Planning: Market‐reflective policies for transmission investment should be considered as a replacement for Texas’ socialized transmission planning, which, by building new transmission in advance of scarcity developing, fails to provide the opportunity for markets to respond.

• Transmission Cost Recovery: Alternatives for transmission cost recovery to replace or reduce dependence on the summer peak demand‐based mechanism for the allocation of sunk transmission costs would reduce distortion of energy market pricing.

An Appendix provides further details on a formulation and computational approach for calculation of co‐optimized prices for energy and operating reserves with local reserve requirements.

Kelly, John. “Dynamic Pricing.” In, 2016.Abstract
Kelly, John. Dynamic Pricing." Presentation to the Harvard Electricity Policy Group's 83rd Plenary Session. Cambridge, MA, June 2, 2016."
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