Analysis of Uniform and Discriminatory Price Auctions in Restructured Electricity Markets*

The settlement rule used to determine payments in electricity market auctions can have a profound impact on the amount paid for a particular service. This paper evaluates two auction settlement rules: the uniform price auction in which the last offer accepted determines the price paid to all participants and the discriminatory price auction in which each participant is paid the amount bid by that party. Using an electricity market simulation tool to model the markets for energy and various ancillary services in a large control area, it is demonstrated that under conditions of market power substantial revenues with commensurately high profits can be commanded under a uniform price auction. By employing a discriminatory price rule, much of the impact of market power can be ameliorated. In addition, a discriminatory price auction, by virtue of requiring each bidder to explicitly state their desired revenue rate, provides greater visibility of attempts to make use of strategic pricing and market power. By discouraging the use of market power through greater price visibility, discriminatory price auctions also have the potential to reduce instances of strategic capacity withholding, which in turn, should enhance overall system reliability.