Auctions with Unknown Capacities: Understanding Competition Among Renewables

49 Pages Posted: 23 Oct 2019

See all articles by Natalia Fabra

Natalia Fabra

Universidad Carlos III de Madrid - Departmento de Economia

Gerard Llobet

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR)

Date Written: October 2019

Abstract

The energy transition will imply a change in the competitive paradigm of electricity markets. Competition-wise, one distinguishing feature of renewables versus fossil-fuels is that their marginal costs are known but their available capacities are uncertain. Accordingly, in order to understand competition among renewables, we analyze a uniform-price auction in which bidders are privately informed about their random capacities. Renewable plants partially mitigate market power as compared to conventional technologies, but producers are still able to charge positive markups. In particular, firms exercise market power by either withholding output when realized capacities are large, or by raising their bids above marginal costs when realized capacities are small. Since markups are decreasing in realized capacities, a positive capacity shock implies that firms offer to supply more at reduced prices, giving rise to lower but also more volatile market prices. An increase in capacity investment depresses market prices, which converge towards marginal cost when total installed capacity is sufficiently large, or when the market structure is sufficiently fragmented.

Keywords: Electricity markets, Forecasts, Multi-unit auctions, renewables

Suggested Citation

Fabra, Natalia and Llobet, Gerard, Auctions with Unknown Capacities: Understanding Competition Among Renewables (October 2019). CEPR Discussion Paper No. DP14060, Available at SSRN: https://ssrn.com/abstract=3474432

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)

Gerard Llobet

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
SPAIN
34 91 429 0551 (Phone)
34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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