Auction mechanisms for long-term electricity contracts: Application to the Colombian market

Abstract

Electricity contracts are long-term supply assurance mechanism still in critical conditions, encourage competition and mitigate the risk of price volatility. However, it is necessary to evaluate design alternatives that balance contracts market versus expectations of the producers and the planner and/or regulator of the system. In this paper an international referencing is made, the formation of long-term price is analyzed, as well as market risks and their management. It implements a market simulation model, applying auction theory and descending clock auction. Contracting strategies are simulated, with product sensitivities, clearance mechanism, supply restriction and payment allocation, considering also the expectation of the buyer. For this, the demand function is estimated, the willingness to pay, and the maximum offer utility by sub-optimal allocations of opportunity cost and efficient frontier. Results show that the descending auction clears at more suitable prices against closed envelope auction and promotes competition under certain characteristics of the demand function. Best results are obtained with a standardized product, but in blocks of no more than 1% of the amount auctioned. A larger size creates infeasible solutions, increasing the closing price that contrasts when considering a supply pivotal constraint, obtaining lower closing prices. The proposed method offers a more suitable solution regarding intervention or handling mechanisms of the demand function.