From the outset of the deregulation of electric power markets all around the world there has been a vast interest both in the engineering and in the economics research communities to develop adequate electricity auctions for the wholesale markets that would work in the complex power systems. The project tests the performance of such auctions by using laboratory experiments with a strictly controlled environment. The auction mechanisms that the project investigates differ from the previously researched auction mechanisms in their offer complexity. While past research focused on auctions where bids and asks were defined as per-unit price for a good, the project studies auction mechanisms where sellers can submit offers stating both fixed fee (e.g. fee to cover the start-up costs of power generating plant) and per-unit price (e.g. dollars per megawatt to cover the variable costs of power generation). The current electric power auctions that are used by Independent System Operators in the United States generally minimize the total offer costs submitted by the power producers. The selected offers are then paid their individual fixed fees and the market clearing prices. It has been argued (Yan & Stern, 2002) that the right auction should minimize the total payment costs. An effective approach to solve the new auction problem that minimizes the total payment costs was developed from an optimization perspective (Luh, et al., 2005). A game theoretic approach has been used to analyze how the new auction affects participant behaviors, electricity prices and efficiency of contract allocations (Knoblauch, 2004; Baltaduonis, 2006). As the ability to find all Nash equilibria in the complex-offer auctions is limited, it is also not immediately obvious whether these auctions would easily elicit competitive market behavior and lead to socially optimal market allocations. Economics experiments lend themselves very naturally for such tests. In this project, subjects participate in a simulated wholesale electricity market and make pricing decisions while performing the role of electricity sellers.
The project evaluates the performance of the current and proposed auction designs with respect to few criteria, including procurement cost of electricity to buyers, allocation efficiency, production efficiency and volatility of electricity prices. The question about how different levels of competition affect the market outcome is also studied according to these criteria. Both auctions are examined against a simple-offer auction mechanism. The project investigates how market clearing institutions affect electricity generator's pricing decisions without making any behavioral assumptions.
Electric power pricing remains a critical public policy issue. For a broader impact this study facilitates the discussion on which auction mechanisms could serve the society best in wholesale power markets. The study can shed some light on the value-added by the complex-offer auctions, and if such value is found, it can help in designing other market mechanisms for the industries where fixed cost component is an important production characteristic.
