Wedad J. Elmaghraby
As auction based mechanisms for electricity dispatch are emerging in previously regulated Electricity Supply Industries, it is imperative to understand the effect of auction rules and structure on efficiency. In this paper, the author addresses this relationship by asking what auction structures are sufficient to guarantee that demand is satisfied in a least-cost manner. What makes this an interesting and challenging question is the existence of electricity industry-specific characteristics such as 1) the existence of start-up costs, 2) the desire of generators to supply several MWh of demand, 3) the cost dependencies in supplying MWh in both time and quantity dimensions, and 4) the inability to store electricity. Using a complete information framework, Elmaghraby finds that any auction design that allows for more than one winner per demand lot (where a demand lot is identified by a distinct set of bids) cannot guarantee efficiency in equilibrium. In order to guarantee efficiency, the auction design must be such that there is only one winner per demand lot and generators submit bids for all demand lots simultaneously.