Working Paper: CEPR ID: DP6626
Authors: Natalia Fabra; Nilshenrik M. von der Fehr; Maria Angeles de Frutos
Abstract: Motivated by the regulatory debate in electricity markets, we seek to understand how market design affects market performance through its impact on investment incentives. For this purpose, we study a two-stage game in which firms choose their capacities under demand uncertainty prior to bidding into the spot market. We analyse a number of different market design elements, including (i) two commonly used auction formats, the uniform-price and discriminatory auctions, (ii) price-caps and (iii) bid duration. We find that, although the discriminatory auction tends to lower prices, this does not imply that investment incentives at the margin are poorer; indeed, under reasonable assumptions on the shape of the demand distribution, the discriminatory auction induces (weakly) stronger investment incentives than the uniform-price format.
Keywords: electricity; investment; market design; regulatory reform; uniform price; discriminatory auctions
JEL Codes: D44; L10; L5; L94
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| discriminatory auction format (D44) | lower prices (P22) |
| discriminatory auction format (D44) | stronger investment incentives (G31) |
| uniform-price auction (D44) | lower prices (P22) |
| price caps (E64) | mitigate inefficient overinvestment (G31) |
| auction format (D44) | marginal return to investment (E22) |
| discriminatory auction (D44) | favorable outcome for consumers (D18) |