PowerFacts
New Studies Show Benefits of Single Clearing Price Auctions, Warn Against Pay-As-Bid
The single clearing-price auction is standard practice in organized wholesale electricity markets as well as in most other commodity markets. Two recently released studies, Single Clearing Price in Electricity Markets, by Professor Ross Baldick of the University of Texas at Austin (with a foreword by Professor Peter Cramton of the University of Maryland), and Market Misconceptions and Regrets About Past Business Decisions, by industry consultant Roy J. Shanker, each concluded that single clearing price auctions are superior to alternatives, notably pay-as-bid auctions. According to the reports, pay-as-bid auctions lack transparency and may have the effect of increasing rather than decreasing electricity prices; in contrast single clearing price auctions ensure consumers are receiving electricity in the most efficient way at the most economical price.
EXCERPTS FROM SINGLE CLEARING PRICE IN ELECTRICITY MARKETS
- "The single market-clearing price provides energy to demand [i.e., customers] at a price that is, by definition, less than the value of consuming that energy. Moreover, by exposing demand to the cost of producing its energy, correct incentives are provided for demand response." Pg. 5
- "If the market is competitive then the clearing-price auction has two wonderful properties. The first is short-run efficiency. The dispatch of generation throughout the day is efficient-the electricity is generated at least-cost to the system, since all generation is supplied by the producers with the lowest cost. The second is long-run efficiency. The single clearing-price auction motivates efficient investment in new generation." - Peter Cramton, Foreword, pg. ii
- "A fundamental observation, however, is that a change in the pricing rule from single market clearing price to pay-as-bid would result in a change in the offers submitted to the market From a practical perspective, there is no empirical or experimental evidence that pay-as-bid would reduce prices significantly compared to single clearing price. In fact, some evidence suggests that pay-as-bid would increase prices compared to single clearing price the theoretical, experimental, and empirical evidence does not support a change to pay-as-bid." Pg. 10
- "There are also a number of very serious drawbacks to pay-as-bid, including: inefficient dispatch; difficulty of participation for small, competitive asset owners; the reduced ability of demand response to mitigate market power; and difficulties for market monitoring Given the lack of compelling reasons for pay-as-bid pricing and its significant drawbacks, consumers are best served if electricity markets retain the single price rule that is standard in organized markets in the United States. Claims that pay-as-bid might improve the performance of electricity markets are unsupported." Pg. 10
- "Pay-as-bid is likely to result in inefficient capital additions by incumbent asset owners, exacerbating market power issues. Other principal remedies against market power such as demand price responsiveness and market monitoring are also thwarted by pay-as-bid." Pg. 24
- "The overall structure [in PJM] is explicitly efficient and pro-competitive. In fact, a major benefit of PJM's market design is that any anti-competitive bidding behavior is more readily apparent as the bid data clearly reveals the differences between the offer price and marginal costs. As Dr. Joseph Bowring, PJM's Independent Market Monitor, has emphasized, because single clearing price markets are very transparent with respect to the relationship between bids and marginal costs it is much easier to detect the exercise of market power." Pg. 5
- "In stark contrast, however, a pay-as-bid market where each successful supplier is paid their offer price, is inefficient, lacks transparency and should result in higher prices. Under pay-as-bid, suppliers are encouraged not to offer their power at marginal cost, but to offer their power at what they project will be the clearing price or the level of marginal costs for an offer to be accepted." Pg. 6
- "Under [the PJM LMP] pricing mechanism, the system has transparent recognition of the cheapest set of resources to meet overall requirements and constraints at each location, and recognizes the uniform value of power in meeting these requirements at each location. Each similarly situated party receives the same locational clearing price, none is subsidized, and each has an incentive to bid competitively at short-run marginal costs." Pg. 5
- "Worldwide, virtually all commodity markets operate in a manner that reflects the so called "law of one price" with effectively a single clearing price adjusted for location, the same intent as PJM's Locational Marginal Pricing mechanism. As PJM's Independent Market Monitor emphasized at an October 2008 hearing, in Pennsylvania, PJM's LMP market is producing transparent, competitive marginal price bids. The heart of this process is a single clearing price mechanism." Pg. 3-4
- "Notably as well, PJM's robust competitive wholesale market provides consumers and state regulators more procurement choices than ever. Prior to competition, there was only one choice: a long-term cost-plus regulated contract. Now we have numerous choices regarding term, pricing, products and risk allocation." Pg. 4
For the complete reports, please visit
http://www.competecoalition.com/files/Baldick%20study.pdf
http://www.competecoalition.com/files/Shanker%20Market%20Misperceptions.pdf New Studies Show Benefits of Single Clearing Price Auctions, Warn Against Pay-As-Bid
CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660
EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.