If Pay-as-bid auctions are not a solution for California, then Why not a reliability market?

Abstract

This document presents some ideas regarding the use of the pay-as-bid pricing rule in multi-unit auctions. In particular, we focus on electricity markets and on the proposals for adopting this kind of mechanism in the California Power Exchange. We find that the pay-as-bid auction has important drawbacks. Instead, we attack the recent problems in California from another point of view and propose an alternative solution.

This document presents some ideas regarding the use of the pay-as-bid pricing rule in multi-unit auctions. In particular, we focus on electricity markets and on the proposals for adopting this kind of mechanism in the California Power Exchange. We find that the pay-as-bid auction has important drawbacks. Instead, we attack the recent problems in California from another point of view and propose an alternative solution.