Bidding and Investment in Wholesale Electricity Markets

In this paper, they compare the competitive benchmark of uniform price auctions and pay-as-bid auctions, taking into account producers’ investment incentives. The authors assume a continuum of technologies from base-load to peakers and derive the equilibrium generation portfolio and bidding strategies. They find that in the short run, pay-as-bid auction may lower costs for consumers, but investment incentives are reduced, which lowers efficiency.