Model-based comparisons of pool and bilateral markets for electricity

A variety of market mechanisms have been proposed and implemented around th e world in order to create competitive electricity pools and exchanges. How ever, it is an open question whether pool-based daily auctions or continuou s bilateral trading deliver different prices under conditions of market pow er. In this paper we present a computationally intensive simulation model o f the wholesale electricity market in England and Wales to isolate and syst ematically test the potential impact of alternative trading arrangements on electricity prices. After eight years of trading under a pool-based system , proposals were initiated in 1998 to change the market in England and Wale s to bilateral trading. This paper uses an agent-based simulation to evalua te two important aspects of that proposal. The results show that daily bidd ing with Pay SMP settlement, as in the original Pool day-ahead market, prod uces the lowest prices while hourly bidding with Pay Bid settlement, as pro posed for the bilateral model, produces the highest prices.