Default Supply Auctions in Electricity Markets: Challenges and Proposals

TL;DR

This paper analyzes premiums in electricity default supply auctions and explores related speculation and hedging activities in power derivatives markets, revealing significant premiums and differing trading behaviors near auction dates.

Contribution

It provides empirical analysis of auction premiums and market behaviors in Spanish and US electricity markets, highlighting the impact of bidding competition and volatility.

Findings

Winning bidders received an average ex-post premium of 7% (CESUR) and 38% (PJM-BGS).

Hedging activities dominate in CESUR, while speculation prevails in PJM-BGS.

Ex-post premiums are negatively related to the number of bidders and spot price volatility.

Abstract

This paper studies premiums got by winning bidders in default supply auctions, and speculation and hedging activities in power derivatives markets in dates near auctions. Data includes fifty-six auction prices from 2007 to 2013, those of CESUR in the Spanish OMEL electricity market, and those of Basic Generation Service auctions (PJM-BGS) in New Jersey's PJM market. Winning bidders got an average ex-post yearly forward premium of 7% (CESUR) and 38% (PJM-BGS). The premium using an index of futures prices is 1.08% (CESUR) and 24% (PJM-BGS). Ex-post forward premium is negatively related to the number of bidders and spot price volatility. In CESUR, hedging-driven trading in power derivatives markets predominates around auction dates, but in PJM-BGS, speculation-driven trading prevails.