Electricity supply auctions: Understanding the consequences of the product definition

Abstract

We study the impact of product definition in electricity auctions. Recognizing the key role of the auction rules—pay as bid, uniform—the definition of the product itself emerges also as a critical step. Poorly designed products may impact both the market performance and the physical operation of the system. We investigate the impacts that the product definition can have on the market outcomes. A product definition implemented in some electricity markets is used to unveil critical aspects that must be considered when electricity products are defined. Our results provide guidelines for improving the product definition in electricity auctions.