Auction basics for wholesale power markets: Objectives and pricing rules

Power systems have distinctive features that greatly complicate the development of auction designs. This study reviews the theory and practice of auction design as it relates specifically to U.S. restructured wholesale power markets, i.e., centrally-administered wholesale power markets with congestion managed by locational marginal prices. Basic auction concepts such as reservation value, net seller surplus, net buyer surplus, competitive market clearing, market efficiency, market pricing rules, supply offers, demand bids, strategic capacity withholding, and market power are explained and illustrated. Complicating factors specific to wholesale power markets are clarified, and recent advances in computational tools designed to address these complications are briefly noted.