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Download Cramton Presentation 5.19.06
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Why the high prices? And what (not) to do about it? Peter Cramton, University of Maryland Steven Stoft, Independent Consultant 19 May 2006 Myth 1: Restructuring! • 72% average increase in Baltimore Solution 1: Impeach Governor • Fire the Public Service Commission PJM Market Results 1998-2005 Comparison of Load Weighted Energy Prices to Fuel-cost Adjusted Load Weighted Energy Prices $70 $60 Spot energy price $50 $40 $30 Fuel-cost adjusted energy price $20 $10 $0 1998 1999 2000 2001 2002 2003 2004 2005 Note: Fuel-cost adjustment based on 1998 reference period and hourly marginal fuel type. All years are power years from April 1 to March 31, except 2005, which is through January 31. Source: PJM. Myth 2: Uniform Price Auction All bids below p0 win and get paid p0 Price Demand Supply (as bid) p0 (clearing price) q0 Quantity Solution 2: Pay-as-Bid Auction All bids below P0 win and are paid what they bid Price Demand Supply (Bids) P0 (clearing price) Q0 Quantity 3 Does pay-as-bid save money? Price Demand Supply (Bids) clearing price P0 $ saved QD Quantity Pay-as-bid Auction “Guess the Clearing Price” • Pay-as-bid rewards those that can best guess the clearing price – Favors larger companies • Spend more on forecasting • More likely setting the clearing price • Uniform price favors those with lowest costs – Favors smaller companies • Big guys make room for smaller rivals • Small guys free-ride on big guys exercise of market power Cornell experimental results (Bob Thomas) • • • • • • 30 Bus Network Human subjects represent six generators Pay real money proportional to profits Compare pay-as-bid with uniform pricing Stochastic load Standby charges for being available Average Prices for Uniform Price Source: Bob Thomas, Cornell Average Prices for Pay-as-Bid Source: Bob Thomas, Cornell Why the high prices? • • • • • • Fuel prices increasing sharply Removal of retail price caps Changes in relative fuel prices, resulting in short-run disequilibrium Insufficient long-term forward contracting Law of one price Uniform-price auction used in the spot market Conclusion • • • Stick with uniform pricing Don’t attempt a regulatory taking of windfall profits Do encourage long-term forward contracts that hedge fuel-price shifts
