This paper examines the optimal choices of two competing auction houses, where each one is able to choose its own auction date so that the auctions run either simultaneously, sequentially, or with an overlap. We show that simultaneously running auctions, per se, is an optimal choice for each house. However, if we fix the supply of objects for sale, then the effects of this simultaneity disappear, and the houses choose arbitrary dates. If the sellers' supply of objects to the auction house is taken into account, then overlapping auctions will be the equilibrium outcome and the optimising behaviour of the auction houses.

Public tenders typically involve uncertainty and unforeseen costs, which might not be fully known to the bidders themselves. This uncertainty may also concern adaptation costs to the procurer after the delivery, and information about such adaptation costs may influence the bidding strategies, even though the cost is paid by the procurer. Consequently, the availability of information matters, and if it is obtained by the procurer, withholding information from bidders may be better than sharing all of it. To investigate the methods of gathering information, we consider pre-qualification stage questionnaires designed to obtain information from the bidders. If suitably designed, they can be used to disclose information of which the bidders are themselves unaware and can thereby serve as a tool for revealing the inherent tendency of the cost for the bidders, so that the unforeseen future cost can be estimated.

This paper studies a public procurement setting in which a seller is requested to submit a cost to be compensated for when delivering a project together with specific technical and economic information. The more complex the information request, the greater the effort the sellers need to exert to deliver a consistent proposal. Each seller is constrained in the sense that its capacity to assess its optimal bidding strategy reaches a limit at the point where the complexity of the information request becomes too demanding for the seller to process it efficiently. We call this point, the information overload point. Under suitable assumptions, we show that the introduction of complexity to the information request leads to a unique equilibrium, where the optimal bids correspond to the bids at which the sellers have reached their information overload. In equilibrium, sellers will submit truthful bids.

We present a simple model of research, in which it is possible to compare the cost of private versus public research activity. The principal aim is to find conditions under which private firms might decide to provide funding, partially or fully, for research carried out by public research organizations. Since the underlying research problem is given, differences in cost depend mainly on the contracts between the firm or the public organization on one side and the researchers employed in the project on the other, together with the incentives which are implied by these contracts. We find that under suitable assumptions it is advantageous for the private firm to outsource its research to a public organization. The free access for the general public to research results obtained by public research organizations may however be an obstacle to outsourcing, unless some public funding is forthcoming.

This paper provides a theoretical analysis of in-house bidding in public procurement tenders. We study the bidding strategies in both a Vickrey auction and a first-price auction, where the buyer participates by submitting an in-house bid. We allow for the buyer to observe all submitted bids before submitting its own bid. Abstracting from any illicit behavior, we show that the bidding strategies of the Vickrey auction resemble those of the first-price auction. Following the unfavorable outcome of the Vickrey auction, we change the buyer’s objective function from minimizing cost for society to minimizing its own cost and show that the latter delivers a lower payment for the buyer than the former.

The German offshore wind tender, launched in April 2017, resulted in three out of the four winning projects being delivered with zero subsidies, relying only on the wholesale price. This result has been regarded as a turning point for the industry. This paper analyses the 2017/18 German offshore wind tenders and the bidding strategies of the winning developers. We then propose a re-design of the tenders with the aim of achieving optimality/zero-subsidies and efficiency - two key properties in mechanism design. The paper contributes to the discussion on how to design offshore wind tenders with both a policy and theoretical perspective. This is of particular relevance given the rapid expansion of this type of investment in Europe and the use of auctions to select developers.

How can the electricity system operator determine the optimal quantity and quality of electricity ancillary services (such as frequency response) to procure in a market increasingly characterized by intermittent renewable electricity generation? The paper presents a system operator's utility function to calculate the exchange rates in monetary values between different frequency response products in the electricity system. We then use the utility function in a two-sided Vickrey-Clarke-Groves (VCG) mechanism combined of two frequency response products 'enhanced and primary' in the context of the system in Great Britain. This mechanism would allow the market to reveal to the system operator the welfare optimal mix of speed of frequency response and quantity to procure. We show that this mechanism is the efficient way to support new faster sources of frequency response, such as could be provided by grid scale batteries.

Modeling market power in electricity markets is fraught as agents compete in prices but interact daily. In deciding what supply to offer, generators need to form judgements on the supplies chosen by rivals and hence the residual demand they face. Many markets are found to have prices above competitive levels, which could be explained by Nash-Cournot behaviour or marking-up above variable costs, but these strategies may not be robust against sophisticated deviants. This paper demonstrates that (1) the Nash choice of the optimal proportional mark-up on marginal costs yields lower prices and profits than Cournot behaviour but higher prices and profits than the optimum fixed mark-up; (2) such mark-up models are robust to single firm Nash deviations, but not against more sophisticated deviations in the deterministic case, nor under demand uncertainty. Proportional mark-up models emerge as the most robust and hence preferred modeling approach.

One of the biggest challenges in the area of infrastructure investment is the provision of funding to finance activities. This paper presents an auction design which can reduce the financing cost of infrastructure investments by allowing the length of the regulatory funding period to be determined via an auction. The auction allows bidders to submit bids against a payment for periods of varying length. Thus instead of, for example, a fixed 20-year contract period, some bidders might want to bid for financing over a longer period, say 25 or 30 years. This can be desirable in terms of securing more favourable terms in the financial markets. Our auction design can secure efficiency and lower financing costs. Our auction is motivated by the auctions currently being undertaken by the UK energy regulator (Ofgem) for financing offshore transmission assets. Although the auction was designed with electricity transmission in mind, the auction could be used in other areas of infrastructure investments

Auction designs in current electricity markets will need to be adjusted to cope with massively increased small-scale distributed generation and demand response, as these are integrated into the electricity system. We present a VCG mechanism that addresses the two most important challenges facing future power systems, namely uncertainty of costs and complexity of bidding strategies. The mechanism is built up around heterogeneous goods, useful for different levels of response time of electricity or different Quality of Service agreements, package bidding and a proxy agent. The proxy agent will ensure optimal bids from non-professional suppliers. Our mechanism has the expected desirable properties by design.

Energy storage seems set to play a key role in managing and balancing the future electricity system. Storage can act as a generator and as a load, providing both energy and ancillary services such as fast frequency response and operating reserve. Therefore, it can provide the desired flexibility for the network. Current mechanism designs do not take advantage of the full potential of a given storage facility and the auctions used to buy and sell potential storage products have design flaws. This paper gives an overview of how storage products are bought and sold today and the problems of the current designs. It then presents a new mechanism design to integrate storage in the most efficient way, based on social welfare.

This paper examines the economics of the electricity market out to 2050. We propose a flexible zoning concept, built up around economic and technical layers, in networks of the order of hundreds of thousands or millions of nodes. The Economic Layer runs auctions to determine the electricity to be delivered and prices. The Economic Layer delivers suggestions after a fixed ordering, starting with suppliers and demands that generates the lowest overall system cost, then second-lowest overall network cost etc. These suggestions are delivered to the Technical Layer that checks for feasibility in terms of technical constraints. The first match between the ranked suggestions and non-violation of technical constraints is chosen. We demonstrate why this paper should be considered for future power systems. This paper extends previous work on reactive power exchange by introducing market considerations in zoning mechanisms for active power exchanges. We are also exhibit the potential for much higher price resolution in distribution networks via our concept of economic zoning.

Energy storage seems set to play a key role in managing and balancing the future electricity system. Storage can act as a generator and as a load providing both energy and ancillary services such as fast frequency response and operating reserve. Therefore, it can provide the desired flexibility for the network. Current mechanism designs do not take advantage of the full potential of a given storage facility and the auctions used to buy and sell potential storage products have design flaws. This paper gives an overview of how storage products are bought and sold today and the problems of the current designs. It then presents a new mechanism design to integrate storage in the most efficient way, based on social welfare.

AbstractA successful market depends on the design and the mechanism used. However, first it needs to be asked – what is the market? How does it work? How does it fail? How can it be fixed when it is broken? One can pose the same questions in the area of electricity and smart grids. The goal is efficient trade. Efficient pricing and allocation are the ingredients necessary to achieve this goal. The right market design can answer the questions and can ensure the desired outcome. This chapter examines the possible transformation of design. It starts with an analysis of the market designs in use today, current changes in designs as a result of smart grids, and a potential market design for the future. Auctions are and have been the main market design mechanism in use. The focus therefore is on the necessary framework for using auctions. Further, it shows that the trend is moving away from the wholesale market toward the retail market to include active consumers with “smart” behavior. It suggests that there will be a move away from the use of capacity and energy markets and back toward an “energy‐only” market. These will have significant impacts on future electricity market design. Finally, this chapter presents a solution that could incorporate these future changes.

In most network asset procurement exercises, network configurations are predefined by the auctioneers. Bidders can neither propose different network configurations nor can they submit bids on a group of network links. We believe the market itself can be designed better. We present a lot structure and an auction design where bidders might propose and build different network configurations and where bidding for packages is a possibility. We demonstrate why the auction design in this paper should be considered for future network procurement exercises through an example, inspired by UK offshore electricity transmission assets, to illustrate our idea.

This paper is an extension of the paper “The Robustness of AgentBased Models of Electricity Wholesale Markets,” EPRG1213 which was motivated by the problem of analysing market power in liberalised electricity markets. That paper examined two particular forms of agent-based models commonly used in electricity market modelling, and showed that while these mark-up equilibria are robust against Nash deviations. This paper extends the earlier results to explain why these equilibria are robust to single firm Nash Cournot deviations but shows they are vulnerable to more sophisticated deviations.

This paper studies the consequences of holding a procurement auction when the principal chooses not to show its preferences. My paper extends the procurement auction model of Che (1993) to a situation where both the principal and the agents have private information. Thus, unknown parameters of both the principal and the agents leads to unclear reaction strategies. I show that an unknown weight on the principal’s valuation of quality leads to the production of to much quality and to high informational rent. A problem that can be reduced using a revelation mechanism. Having an unknown weight on quality gives rise to an analysis of a principal that can not fully commit to the outcome induced by the scoring rule. Therefore, my result apply to contract theory and it’s problems with imperfect commitment.