auctions and future energy systems: micro auctions for distributed generation with flexible zones

www.eprg.group.cam.ac.uk

Auctions and Future Energy Systems: Micro auctions for distributed generation

with flexible zones

Thomas Greve and Michael G. Pollitt ([email protected] and [email protected] )

2nd Interdisciplinary Workshop on Smart Grid Design and ImplementationUniversity of Florida

29 March 2014

mailto:[email protected]

mailto:[email protected]


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•This project is part of:– EPSRC Autonomic Power Project.– Started in 2011 and ends in 2016.– 8 universities and 9 industrial partners.

•This project focuses on the electricity network of 2050:– the energy networks of the future will be far more difficult to manage and design than those of today, for technical, social and commercial reasons. – need for ’self-*’ network.

The Autonomic Power Project

Source: APS (2011)


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Four key areas of research1. Self* network operation and control.

2. Resilience and risk management.

3. Active participation of consumers.

4. Autonomic economics. - WP1: Economic thinking zones for future complex power systems. - WP2: Micro auctions for distributed generation with flexible zones.

www.electricitypolicy.org.uk

The challengeIn short:(1) increasing energy prices (possibly!) we need a tool to hold down prices.(2) changing distribution of demand we need a tool to secure that cheapest supplier follows demand.(3) new energy sources and an increasing in small-scale renewables we need a tool to respond to an unpredictable market.(4) operators to consider multiple markets we need a tool to respond to the possible exercise of market power and collusion.

Assumption:Unlimited computer power.


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In short:(1) increasing energy prices (possibly!) we need a tool to hold down prices and increase price legitimacy – auction design.(2) changing distribution of demand we need a tool to secure that cheapest supplier follows demand – flexible zones.(3) new energy sources and an increasing in small-scale renewables we need a tool to respond to an unpredictable market – proxy agent (auction design) and Quality of service.(4) operators to consider multiple markets we need a tool to respond to the possible exercise of market power and collusion – proxy agent (auction design), auction design and flexible zones.

Our contribution


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The Beauty of Auctions• Fairness: select the outcome that achieves a certain fairness criterion in

utility.

• Budget-balanced: implement outcomes that have balanced transfers across players.

• Efficiency (truth-telling): select the outcome that maximizes total utility.

• Revenue maximization/Cost minimisation (typically referred to as optimality): select the outcome that maximizes revenue to a seller/minimizes costs to a buyer.

• Pareto optimality (alternative): occurs when no one can be made better off without making someone worse off.

With truth-telling: the winner will always be the person with the highest valuation of the good. Therefore, the item belongs to the person/group who values it most, social welfare is optimised.


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Second-price sealed-bid auction• All sellers submit bids. • Seller submitting the lowest bid wins and gets paid

the second lowest bid.

• Bidding strategy is easy– Bidding one’s true valuation is a dominant strategy.

• Intuition:– The amount a bidder pays is not dependent on her bid.

$700

$400

$500

$300

WINNER! Receives $400


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Uniform price auction• Also known as a the "clearing price auction“.• A multi-unit auction. • A number of identical units are sold for the same price. • In theory, the uniform-price auction provides an incentive for bidders to bid

insincerely (unless each bidder has demand for only a single unit). • An inefficient equilibrium.

Example revenue auction• Consider a situation in which there are six units (K =6) to be sold to three

bidders and the submitted bid vectors are– b1 = (50, 47, 40, 32, 15, 5), – b2 = (42, 28, 20, 12, 7, 3), – b3 = (45, 35, 24, 14, 9, 6), – b = (50, 47, 45, 42, 40, 35), next is 32. The market-clearing price is 32.

Bidder 1 wins three units and pays a total of 3*32 = 96. Bidder 2 wins one unit and pays a total of 1*32 = 32. Bidder 3 wins two units and pays a total of 2*32 = 64.


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Proxy agent• The proxy agent will be used:

– as an aggregator of bids for a number of different small-scale renewables. – to determine the seller’s Willingness To Accept (WTA) and therefore, compute

the bidders optimal strategy. The optimal strategy for a seller is to tell the proxy agent its WTA.

• A proxy agent is an agent or software which submits bids on a bidder behalf.

• The bid is decreased by a minimum increment (in theory conducted with negligibly small bid increments) until the second-lowest submitted proxy bid is exceeded by another bid.

• The bidder who submitted the lowest proxy bid wins the object and receives the price that is equal to the second-lowest (proxy) bid.


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• At the moment the auction is not efficient.

• At the moment there is no variation in bids to help and handle special groups (like small scale suppliers).

• Active use of proxy agents - the optimal bid.

Why auctions!


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• At the moment there are no flexible zones!

• Can secure demand equal to supply within an internally unconstrained area:– Place a zone in the right place, ensure local

supply=demand.

• Can secure that lowest cost suppliers deliver.

• Therefore, help the auction to secure welfare improvement or optimality.

Why flexible zones!


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• Existing (distribution) networks are not ready to cope with the uncertainty and complexity in future networks and far away from being ready for the complexity which might exist by 2050.

• An efficient auction.

• Flexible zones.

• We need a method to help and handle small scale suppliers.

• We need an auction and zoning design to secure truth-telling (”efficiency”) and an efficient allocation (”optimality”) in all zones.

Aim: lowest possible consumer prices and welfare improvement

Autonomic Power Project


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• To operate with flexible zones - improve initial zones and use flexible zones to find lowest cost combination of

suppliers (i.e. generators or DR aggregators).- Locational pricing with competition can provide larger benefits.

• To design an auction that can take advantages of the flexible zones and handle or use small scale suppliers. Rules for suppliers:

1. A supplier has to be signed up for auction if it wants to participate.2. A proxy agent will aggregate all small small-scale renewables and submit

bids.3. If a small-scale supplier is not connected to a proxy agent, it may sign-up

for the auction. If a supplier is not signed up, the supplier cannot get access to a distribution line.

4. Quality of service/subscriptions - to respond to the unpredictable nature of renewable generation:

• Gold subscription = electricity delivered when demanded• Silver subscription = electricity delivered within 15 min• Bronze subscription = electricity delivered within 30 min

Tools - Flexible zones and auctions

Assumption: Active consumers


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Auction design 1 – English auction with proxy

bidding (ebay auction)


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It is March 26, auction starts for March 26, time interval 6-6.30am

8 suppliers or 8 proxy agents have signed up for auction:

Zone 1

• Gas 1 • Wind 1

• SSS 1a • SSS 1b • ND 1 • ND 2 Zone 2

• Wind 2 • Gas 2 • SSS 2b • Wind 2a

Demand 20Zone 1

Demand 20

Zone 2

10 MWh Gold

Initial zoning

SSS: small scale suppliers

ND: negative demand

10 MWh Silver

10 MWh Gold

10 MWh Silver


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• Consider the bidding process for Gold in Zone 1. • Two identical items offered for sale – a licence to deliver 1 MWh Gold

and a licence to deliver 1 MWh Gold, in 10 simultaneous auctions. • Assume that each bidder only desires one item (in each auction). • Gas 1 instructs her proxy to bid down to £163 per MWh for the item,

and wants three MWh. • Wind 1 instructs her proxy to bid down to £120 per MWh, and wants

three MWh. • SSS 1a instructs her proxy to bid down to £123 per MWh, and wants

that it wants five MWh. • SSS 1b instructs her proxy to bid down to £122, and wants three

MWh. • The reserve price is set to £165 per MWh.

Initial zoning – proxy agent bids


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The rules of the auction • Every bidder has to submit bids (/values) to a

proxy agent. Each bidder can make one bid in each auction.

• Multi-unit action. The auctioneer looks at all the bids and divides the auctions (the 10 auctions) after highest valuations.

• The two lowest proxy bidders win one item each at a price that is an increment below the highest losing bid.


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Initial zoning, zone 1 – submitted bidsTable 1 Submitted bids in zone 1, auction 1

• Winners: Wind 1 and SSS 1b (win one MWh each). • Price: £122.99 per MWh.


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Zone 1 - result

Table 2: Winning bidders and allowed price, zone 1, Gold

Result• Auction 1: Wind 1 and SSS 1b win one MWh each.• Auction 2 and 3: the same result.• Auction 4 and 5: Gas 1 and SSS 1a win two MWh each, price of £165 per MWh.• Auction 6-10: No bidders.

Remember


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Zone 2 - result

Table 3: Winning bidders and allowed price, zone 2, Gold

Result• Auction 1: Wind 2 and SSS 2b win one MWh each.• Auction 2-7: the same result.• Auction 8-10: Gas 2 and SSS 2a win three MWh each, price of £160 per MWh.

Note• Wind 1 and SSS 2b can deliver extra 4 MWh.

Notice


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New zoning?• The APS will self-optimise and self-configure if it can see a lower cost network.• Assume that all bidders can deliver to consumers in both zones, and physical constraints

allow this. • Suppose that it is possible to combine Wind 1, Wind 2, SSS 1b and SSS 2b in a new zone.

Old zone 1

• Gas 1 • Wind 1

• SSS 1a • SSS 1b • ND 1

• ND 2 Old zone 2

• Wind 2 • Gas 2 • SSS 2b • Wind 2a

New zone


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New zoneTable 4: Winning bidders and allowed price, new zone, Gold

Table 5 Result with and without flexible zones, new zone, Gold


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Disadvantages• Difficult to explain the second-price rule, but with proxy bidding it makes sense.

• Dynamic auction, rounds, but with unlimited computer power this disadvantage is eliminated.

• Not a package auction.

• Have heterogeneous – Gold, Silver and Bronze. Is there a better auction?

Advantages• The Autonomic Power Project idea is in the auction design.

• The auction design means that the auctioneer does not have to choose the prices before learning bidders’ preferences.

• The auction allows bidders to submit bids on more variables – Gold, Silver, Bronze, Reserve, Big consumers etc.

• The auction is efficient.

• We can help, handle and control small-scale renewables.

• Active use of proxy agents promote competition and makes the second-price rule interesting.

• Gives the consumers more options – consumers participation (washing machine).

• Day-Ahead auction and Real-Time Market can work together.

Advantages/Disadvantages of the design


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Auction design 2 – Package Clock Auction

(telecom auction)


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Spectrum sale

Source: DotEcon and Analysys Mason, 2009


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Package Clock Auction

Source: Dotecon (2009)


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Initial zoning, zone 1, the lots

Table 6: Number of lots offered for sale and reserve prices per lot

Table 7: Penalty for bids on lot Gold1-3 and lot Silver1-3

Lots to auctioned – two categories1. Available if the network self-optimise and self-configure. 2. Only deliver to initial zone = penalty.


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Principal stage – primary round• A clock auction.• Promote price discovery. • Gives a sense of what the prices are and possible package to win. • Bid increments together with activity rules yield higher efficiency.

Table 8: The clock auction


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Principal stage – supplementary round • A single round opportunity - best offer for all available packages.• A sealed-bid round. • Subject to caps. • Can fully express their preference for packages of lots/express its true

value for these packages.

Table 9: The supplementary round


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Winner determination and base prices• Vickrey-Clarke-Groves (VCG) mechanism, a truth-telling mechanism.

Table 10: All bids made in the auction

Table 11: Lowest value combination


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Assignment stage • Will determine the specific assignment of lots to each winning bidder,

subject to the number of lots won in the principal stage. • Is there because of the restriction on line capacity lots Gold 1-3 and

Silver 1-3 may be more desirable. • A sealed-bid round. • Maximize total value across all winning bidders.




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Final assignment and allowed price for desired lots

Table 13: Winning bidders and allowed price for desired lots

• SSS 1a and SSS 1b want the same package. However, SSS 1a has submitted the highest price reduction. SSS 1a wins Gold 1-3 and Silver 1-3.

• Wind 1 and SSS 1b pay zero.

SSS 1a’s base price is £882. First, according the VCG mechanism SSS 1a’s price has to be reduced by

£1, SSS 1b’s bid. Second, SSS 1a has to pay a penalty of 1% for both Gold and Silver lots. SSS 1a pays a

price of (£882-£1)*0.02 =£18.

Remember


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Zone 2

Table 15: Winning bidders and allowed price for desired lots, zone 2

Table 14: All bids made in the auction Notice


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Zone 2 and new zone

Table 17: Winning bidders and allowed price for desired lots, new zone

Table 16: Winning bidders and allowed price for desired lots, Zone 1 and 2


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Disadvantages• Dynamic auction, rounds, but with unlimited computer power this disadvantage is eliminated.

• Greater efficiency.

Advantages• The Autonomic Power Project idea is in the auction design.

• The auction design means that the auctioneer does not have to choose the prices before learning bidders’ preferences.

• The auction allows bidders to submit bids on more variables – Gold, Silver, Bronze, Reserve, Big consumers etc.

• A package auction.

• We can help, handle and control small-scale renewables.

• Active use of proxy agents promote competition and makes the second-price rule interesting.

• Gives the consumers more options – consumers participation (washing machine).

• Day-Ahead auction and Real-Time Market can work together.

Advantages/Disadvantages of the design


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Design 1 – English auction with proxy bidding- (1) Efficient, (2) Not a package auction

Design 2 – Package Clock Auction– (1) Greater efficiency, (2) A package auction

SO –(1) If efficient – placing the MWh in hands other than those who value

them the most. (2) the flexible zones secure – “the right supplier” is matched with “the

right consumer” - lower prices- Pareto improvement or maybe optimality

(2) Proxy agent:- Can handle and help small scale suppliers and promote competition- Secure the optimal WTA

Conclusion

www.electricitypolicy.org.uk

Next Steps

• Working on different auction designs.

• Need to test our flexible zoning for feasibility.

• Need to test our auction designs for feasibility.

• Mechanism for market power.

• A software to check for collusion – filter.

auctions and future energy systems: micro auctions for distributed generation with flexible zones

Documents

energy prices

flexible zones auctions

demand flexible zones

future energy systems

micro auctions

energy networks

new energy sources

autonomic power projectsource