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Learning from California's QF Auction

Fortnightly Magazine - April 15 1995

to score bids in the California QF auction. But the CPUC would achieve the desired results from the way it defined the payment structure.

One would calculate the premium due to a winning QF by removing that QF from the auction and resolving the optimization problem. The second-price premium for the QF is the resulting increase in the objective function. As in the California QF auction, this premium is allocated over the QF's capacity costs. The payment mechanism in the contract can be made compatible with the auction structure through a similar analysis defining the payment penalties for a QF that does not meet the capacity factors that it bid.

In this auction, a QF would maximize its profit by bidding its true costs and capacity factors. This bidding strategy would maximize a QF's profits no matter how the other QFs bid. And this definition of a second-price QF auction offers an added benefit. Even though the calculations involved are fairly complex, it is easy to explain how a winning QF's prices will be set: Each kilowatt of capacity that a QF wins in the auction will be paid the highest cost the QF could have bid for it and still have won the right to provide that increment. That's easy to understand for bidders. t

Paul Gribik is a vice president of Mykytyn Consulting Group, Inc., a firm specializing in business analysis and information technology for energy and telecommunications firms. Dr. Gribik's recent work includes structuring auctions for electric and gas utilities, and developing models for evaluating the business potential of new energy technologies. He has a BS in electrical engineering and an MS and PhD in industrial administration from Carnegie-Mellon University.

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