Uniform-Price Auctions in Electricity Markets
Uniform-Price Auctions in Electricity Markets
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Publication or External Link
Date
2006-03-20
Authors
Cramton, Peter
Stoft, Steven
Advisor
Citation
"Uniform-Price Auctions in Electricity Markets," (with Steven Stoft), Electricity Journal, 20:1, 26-37, 2007.
DRUM DOI
Abstract
Wholesale electricity markets are commonly organized around a spot energy market.
Buyers and suppliers submit bids and offers for each hour and the market is cleared at
the price that balances supply and demand. Buyers with bids above the clearing price
pay that price, and suppliers with offers below the clearing price are paid that same
price. This uniform-price auction, which occurs both daily and throughout the day, is
complemented by forward energy markets. In practice, between 80 and 95 percent of
wholesale electricity is traded in forward energy markets, often a month, or a year, and
sometimes many years ahead of the spot market. However, because forward prices
reflect spot prices, in the long run, the spot market determines the total cost of energy. It
also plays a critical role in the least-cost scheduling and dispatch of resources, and
provides an essential price signal both for short-run performance and long-run
investment incentives. Arguments that the uniform-price auction yields electricity prices
that are systematically too high are incorrect. However, insufficiently hedged spot
prices will result in energy costs that fluctuate above and below the long-run average
more than regulated prices and more than is socially optimal. Tampering with the spot
price would cause inefficiency and raise long-term costs. The proper way to dampen the
impact of spot price fluctuations is with long-term hedging. Although re-regulation can
provide a hedge, there are less costly approaches.