12 November 04: Market Analysis advises Cemig on Brazilian power auction design
The Brazilian Ministry of Mines and Energy plans to hold a procurement auction in early December 04 for three types of long-term energy contract. The auction will potentially involve the purchase of more than 24,000 averageMW from Brazilian electricity generators. Demand for the contracts will come from Brazilian electricity distribution companies.
The ministry’s proposal is to hold a two-stage procurement auction. The first stage is a multi-product, descending clock auction, similar in overall design to those used to auction virtual electricity generation capacity in France. The second stage is a multi-product, sealed-bid discriminatory auction with some complex and apparently novel features. The purpose of the first stage is the usual one of "price discovery." Multi-round, dynamic auctions can help to reduce "common-value uncertainty," enabling the sellers to bid more aggressively with less fear of the "winner’s curse." In addition, when many interrelated products are being sold simultaneously, the information revealed in a dynamic auction can serve the important function of enabling bidders to see tentative price information and make better-informed decisions about the quantities of each product to sell.
The purpose of the second stage is less clear. It may be intended to generate additional price competition and hence result in lower average prices, to reduce opportunities for collusive behaviour, or to encourage participation by weaker bidders. However, as we pointed out in our brief report on the auction, the design of the second stage makes predicting equilibrium bidding behaviour difficult and it would appear as likely to increase inefficiency via distorting bidding incentives as to serve any positive purpose such as overall price reduction.
Market Analysis was retained by Cemig (www.cemig.com.br) to advise on the auction design issues during the ministry’s consultations. Our report can be found on the Publications/Reports and Submissions section of the website.