New university studies add to arguments favoring markets

Restructuring Today

Compete Coalition is looking at several reports considering "misconceptions" about power markets.

The single price clearing auction, a central feature of competitive power markets, helps to efficiently allocate generation resources on a least-cost basis and is superior to proposed alternatives, said a new study released yesterday.

"Electricity markets should maintain the single price rule that is standard in organized markets in the United States," concluded a study by Professor Ross Baldick of the University of Texas in Austin called "Single Clearing Price in Electricity Markets."
A proposed alternative to the single clearing price auction, where sellers are paid their bid price rather than the auction's clearing price, would impair the efficient dispatch of generation and make it more difficult to police against the exercise of market power, Baldick warned. And the study rejected unsupported arguments that pay-as-bid would result in lower power prices.

"Claims that pay-as-bid might improve the performance of electricity markets are unsupported," Baldick found.

His findings were echoed in another paper being released today called "Market Misconceptions and Regrets about Past Business Decisions."

"Worldwide, virtually all commodity markets operate in a manner that reflects the so-called law of one price with effectively a single clearing price adjusted for location," said report author Roy Shanker.

The study found most of the criticisms of power markets today are more about past bad business decisions than about the actual market designs.

"The main argument against a single clearing-price auction is political, not economic," observed University of Maryland economist Peter Cramton in a foreword to the Baldick report.

"When electricity prices are high, critics point to the disparity between the clearing price and the marginal cost of generators using less expensive fuel," said Cramton.

"What they fail to appreciate is that these higher profits of the low-cost generators are needed to cover the much higher fixed-costs of these resources that use less expensive fuel such as hydro, nuclear, solar and wind. In addition, the higher spot price motivates the demand side to conserve."