Download Colombia Firm Energy Auction: Descending Clock or Sealed-Bid?

Colombia Firm Energy Auction:
Descending Clock or Sealed-Bid?
Peter Cramton
University of Maryland
3 June 2015
I am grateful to CREG for funding this research. The views are my own.
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Outline
• Review of key features of market
•
•
•
•
Purpose of market
Why forward procurement?
Commitment period
Demand curve
• Comparison
• Descending clock auction
• Sealed bid auction
• Recommendation
• Other issues
• Questions
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Purpose of market
• Induce just enough investment to maintain
adequate resources
• Induce efficient mix of resources
• Reduce market risk
• Avoid market power in firm energy market
• Reduce market power in energy market
• Pay no more than necessary
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Why forward procurement?
• New projects compete in advance of entry
• Coordinated entry
•
•
•
•
Less uncertainty in achieving target
Avoid boom/bust
New resources set price directly
Less reliance on demand curve for price setting
• Long-term commitment for new resources
• Reduced investor risk
• Better price signal for new investment
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Commitment period
• New resources ― up to 20 years
• Generator selects duration at qualification
• Long commitment lets new resources lock-in firm energy
price, reducing risk and encouraging investment
• Price is in constant $ (adjusted for inflation)
• Existing resources ― one year
• Does not need long commitment, since costs are already
sunk
• Short commitment reduces risk (more draws from price
distribution)
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Demand curve
Price of
firm energy
2 CONE
Price ceiling
CONE
Existing supply can exit at
prices below 80% of CONE
½ CONE
0
Price floor
 4%
Target
CONE = Cost of New Entry (marginal unit)
Firm energy
Uncertainty added of  1.5%
to address generator market
power; set by auctioneer
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Comparison of
descending clock
and sealed-bid
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International experience
• Descending clock
•
•
•
•
Colombia
Brazil
New England
United Kingdom
• Sealed bid (currently under consideration)
•
•
•
•
PJM
(New England)
(Ireland)
(Colombia)
Descending clock auction
• Auctioneer announces high starting price
• Generators name quantities
• Excess supply is determined
• Auctioneer announces a lower price
• Process continues until supply equals demand
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Descending clock auction
(Auctioneer’s perspective)
Price of
firm energy
Supply
Rejected
Supply curve is expressed
in a series of rounds,
starting with price ceiling
PC
Accepted
Demand
0
QC
Firm energy
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Descending clock auction
(Bidder’s perspective)
Price of
firm energy
P1
P2
P3
P4
P5
Supply
Only supply at end of
round is revealed to bidders
Demand
0
Firm energy
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Sealed-bid auction
(Auctioneer’s perspective)
Price of
firm energy
Supply
Rejected
Supply curve is expressed
in a single round, starting
with price ceiling
PC
Accepted
Demand
0
QC
Firm energy
In all other respects the two approaches are identical!
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Descending clock ≈ Sealed-bid
Price of
firm energy
Both formats are single-price auctions
Supply
Rejected
PC
Accepted
Demand
0
QC
Firm energy
The two only differ to the extent generators change exit bids
in response to information revealed after each clock round
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Why change your exit bid?
Reason 1: Exercise market power
Price of
firm energy
Supply
Rejected
P’C
Generator sees an
opportunity to increase price!
PC
Accepted
Demand
0
QC
Firm energy
This unilateral exercise of market power is undesirable, as it
may lead to prices that are above competitive levels.
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Why change your exit bid?
Other reasons
• Revelation of common value uncertainty
• Causes bidders to bid more or less aggressively as they
get information about the supply curve
• Outcome discovery
• Budget, portfolio, or other constraints cause a shift in
business plans
Both of these reasons are good reasons
for the adjustment of exit bids—
consistent with economic efficiency
But neither seems too important in the case of a
small number of new bids and a single merit order
Other factors to consider
• Privacy
• Clock auctions respect the privacy of infra-marginal bids
• Only reveal the high (rejected) portions of supply curve
• Winning generators only reveal,
“I’m willing to supply at the clearing price”
• Transparency
• Clock auctions have a higher level of transparency as bidders
can see the supply curve as it is bid
• Simplicity
• A clock auction is slightly harder to conduct and participate in
than a seal-bid auction; auctioneer introduces uncertainty to
address market power
• However, with proxy bidding, participation can be just as easy
But none of these factors are important in this case
of a small number of new bids and single merit order
Summary of pros and cons and
there importance in this setting
Issue
Exercise of market power
Revelation of common value uncertainty
Outcome discover to manage aggregate constraints
Privacy of infra-marginal bids
Transparency
Simplicity
Descending
clock
Sealed-bid
Recommendation
• Colombia should shift to a sealed-bid auction
Other issues
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Addressing lumpy resources
• Single-price auction is easily defined for divisible
products
• Clearing price and quantity established by intersection
of supply and demand
• Market clearing is exact
• With lumpy resources
• Exact clearing is not possible
• Select winnings with efficiency objective
Accept collection of offers that maximize net value
(gains from trade)
• Supporting prices generally do not exist
• Best pricing approach is complex and setting specific
Clearing rule: maximize net value
P
1.
P
2.
P
S
3.
S
S
Unit
accepted
PC
PC
PC
Unit
rejected
D
D
Q
D
Q
Q
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Example maximization of net value
P
net value A =
B
minus
S
A
PA
D
Q0
QA
Q
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Example maximization of net value
P
net value B =
B
PB
minus
S
D
Q0
QB
Q
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Auction frequency
• All reliability markets other than Colombia have
annual auctions
• Annual auctions provide steady opportunity for entry
and exit
• Annual auctions send price signal based on need
• Higher price when new entry is required
• Lower price when surplus
• New and existing compete in all years
• Colombia should consider shift to annual market
Recent developments in reliability
markets
• All reliability markets other than Colombia have had performance
incentives that were too weak
• Rules allowed many “excuses” for not delivering energy during scarcity
periods
• This led to poor performance and near crisis situations
• Several markets now have adopted strong performance
incentives, which like Colombia’s reliability option, eliminates all
excuses
• New England: pay-for-performance (shortage price = $5400/MWh)
• PJM: capacity performance (shortage price = $2700/MWh)
• Texas: scarcity pricing (shortage price = $9000/MWh)
• High spot price in reserve shortages is essential to motivate
operational reliability in thermal systems
• Colombia needs high spot in its long and rare scarcity events
• In all markets, it is important that load is properly hedged
Questions
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