Working Paper: CEPR ID: DP18189
Authors: Stefan Bergheimer; Estelle Cantillon; Mar Reguant
Abstract: Wholesale electricity markets solve a complex allocation problem: electricity is not storable, demand is uncertain, and production involves dynamic cost considerations and indivisibilities. The New Zealand wholesale electricity market attempts to solve this complex allocationproblem by using an indicative price and quantity discovery mechanism that ends at dispatch. Can such a market mechanism without commitment provide useful information? We document that indicative prices and quantities are increasingly informative of the final prices and quantities and that bid revisions are consistent with information-based updating. We argue that the reason why the predispatch market is informative despite the lack of commitment is that it generates private benefits in terms of improved intertemporal optimization of production plans.
Keywords: Electricity Markets; Price Discovery; Preplay Communication; Non-Trading Mechanisms; Coordination; Intertemporal Optimization
JEL Codes: D47; D83; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| predispatch market facilitates generation coordination (D47) | optimization of production plans over time (D25) |
| iterative mechanism in the predispatch market (D47) | effective price discovery (D41) |
| indicative prices and quantities produced in the predispatch market (L97) | final prices and quantities (P22) |
| bid revisions (D44) | indicative prices and quantities produced in the predispatch market (L97) |