Investment Incentives and Auction Design in Electricity Markets

59 Pages Posted: 5 Jun 2008

See all articles by Natalia Fabra

Natalia Fabra

Universidad Carlos III de Madrid - Departmento de Economia

Nils-Henrik M. von der Fehr

University of Oslo - Department of Economics

Maria Angeles de Frutos

Universidad Carlos III de Madrid - Department of Economics

Date Written: January 2008

Abstract

Motivated by the regulatory debate in electricity markets, we seek to understand how market design affects market performance through its impact on investment incentives. For this purpose, we study a two-stage game in which firms choose their capacities under demand uncertainty prior to bidding into the spot market. We analyse a number of different market design elements, including (i) two commonly used auction formats, the uniform-price and discriminatory auctions, (ii) price-caps and (iii) bid duration. We find that, although the discriminatory auction tends to lower prices, this does not imply that investment incentives at the margin are poorer; indeed, under reasonable assumptions on the shape of the demand distribution, the discriminatory auction induces (weakly) stronger investment incentives than the uniform-price format.

Keywords: Electricity, investment, market design, regulatory reform, uniform price and discriminatory auctions

JEL Classification: D44, L10, L5, L94

Suggested Citation

Fabra, Natalia and von der Fehr, Nils-Henrik M. and de Frutos, Maria Angeles, Investment Incentives and Auction Design in Electricity Markets (January 2008). CEPR Discussion Paper No. DP6626, Available at SSRN: https://ssrn.com/abstract=1140555

Natalia Fabra (Contact Author)

Universidad Carlos III de Madrid - Departmento de Economia ( email )

E-28903 Getafe (Madrid)
Spain
+34-91 6249594 (Phone)
+34-91 6249329 (Fax)

Nils-Henrik M. Von der Fehr

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 22 85 51 40 (Phone)
+47 22 85 50 35 (Fax)

Maria Angeles De Frutos

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

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