Hold on to your hats. The vaunted and vilified “standard market design”, once thought dead and buried, has been resuscitated, with all attendant chaos and rhetoric, but this time in the guise of a...
Anatomy of Sealed-Bid Auctions
Bringing flexibility and efficiency to energy RFPs.
retail competition has been introduced (see Table 1) . In surveying these auctions, the details regarding the quantity of peak load being purchased, the bid format and offer pricing structures, and the auction-clearing methodology appear to be particularly important for understanding how these processes work. 5
• Tranche Size: Full-requirements load-following products are purchased in discrete units called tranches. A tranche is a percentage of hourly load for a given grouping of non-shopping customers established by the electric utility. 6 Tranches, as measured by the estimated amount of peak load that they represent, tend to be around 50 MW in size, 7(see Table 1) . However, in some instances tranche sizes are considerably larger. For example, NSTAR (in Massachusetts), Central Maine Power, and Connecticut Light & Power have tranche sizes that are estimated to exceed 100 MW.
Tranche size has important implications for the competitiveness of sealed-bid auctions and the prices that they return. Using relatively small tranche sizes can provide incentives for smaller suppliers to compete and often results in utilities obtaining supplies from more than a single supplier in any given solicitation. On the other hand, larger tranche sizes arguably can lower transaction costs as fewer suppliers ultimately are needed to meet customer loads. It’s difficult to determine with certainty the impact of tranche size on an auction’s competitiveness, given that only limited information on the competitiveness of these auctions is publicly released. However, where such auction details are reported, some anecdotal evidence suggests smaller tranche sizes seem correlated with more bidders. For example, Pepco Maryland has tranche sizes around 50 MW and its recent solicitations have had between seven and twelve bidders, while Connecticut Light & Power has tranche sizes around 400 MW and its recent solicitations have had between four and eight bidders. 8 Thus, smaller tranche sizes may encourage greater supply-side competition.
• Bid Format and Offer Pricing Structure: The format of bids being submitted in a sealed-bid auction dictates the pricing offered by suppliers for the products and terms sought by the utilities. Bidders typically input the details of their offers into a pre-formatted Excel spreadsheet that defines the number of tranches, contract duration, and pricing associated with their bids. While bid formats ostensibly are comparable across auctions, offer pricing structures can vary considerably.
An auction’s bid format can be as simple as requesting a single price per tranche that applies to a particular customer grouping for the entire term of the contract, or as complex as requesting several prices per tranche that apply to different customer rate schedules ( e.g., within a customer grouping) and vary based on time of day and time of year. Examples of the simple bid formats can be found in the solicitations by the Maine PUC, Delaware’s Delmarva Power & Light, and PPL Electric. These solicitations request a fixed price for a given term for a particular group of customers; the fixed price that wins the sealed-bid auction forms the basis of the customers’ rates. 9
Bid formats that request more refined offer pricing do so in two