The Limits of Auctions: reflections on the role of central purchaser auctions for long-term commitments in electricity systems

This paper looks at the deployment of auctions in electricity systems, and in particular at the predominant form of auction currently in use: a ‘one-sided’ auction in which a central purchaser, usually acting as an agent of the government, acquires new capacity for the purposes of meeting carbon targets or securing reliability. The use of this particular form of the instrument has been spreading rapidly in many countries across the world to the extent that it may be regarded as normal practice in some contexts – such as the procurement of new conventional generation capacity and renewable energy sources – and that further extensions into other areas – like network expansion – have been proposed. However, the widespread use of auctions of this sort is a relatively recent phenomenon and it raises a number of questions.

•          How should we view the development?

•          Are auctions of this kind a useful market-based tool to complement other methods of resource development?

•          Are they a type of second best – a symptom of the fact that electricity markets themselves are broken and can no longer give appropriate signals?

This paper aims to discuss these general questions relating to the use of such auctions. It does not attempt to go into the details of central buyer auction design or to study particular uses of the auction tool in different countries. Nor does it explore or question the use of auctions by private buyers to acquire electricity. It concludes that, while auctions will certainly continue to have an important place in electricity, governments should be more cautious about their use and should be thinking about alternatives; these would include new energy market designs that reflect twenty-first century technologies and economics, especially those reflecting the high penetration of renewables and the more active participation of consumers. A key goal in developing markets for a sustainable future should be to empower consumers as far as possible – and ‘one-sided’ auctions, at least in their present form, are not necessarily the best tool for this purpose.

By: Malcolm Keay , David Robinson

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