The role of auctions in electricity systems

Auctions are increasingly being used for the procurement of new services and resources within electricity systems.  For instance, auctions are now a standard means of promoting renewables; capacity auctions are being introduced in many countries; tenders for specialised services (like black start and frequency response) are commonly employed by grid operators; and the recent Helm Report in the UK suggested using auctions more widely for network extensions and the like.  How should we view this development?  Are auctions a useful market-based tool to complement other methods of resource development? Or are they rather a second best – a symptom of the fact that electricity markets themselves are broken and can no longer give appropriate signals?  What are the circumstances in which auctions are a useful instrument and when should other options be sought?

To explore these questions the study will examine three sets of evidence:

  1. Recent experience with electricity auctions, including those in Europe and the non-European examples being examined in parallel OIES papers. Have they been effective in achieving their immediate objectives and, importantly, wider system objectives?
  2. Experience with public sector auctions in other areas (such as radio spectrum allocation, offshore hydrocarbon licensing, rail franchising and defence procurement). That experience has been somewhat chequered and may throw light on the research questions outlined above.
  3. The general literature on auction theory, which may also provide helpful pointers.

The study will review this evidence and make recommendations in relation to the research questions.

By: Malcolm Keay , David Robinson

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