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The role of submodularity in capacity auctions

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MESW02 - Electricity systems of the future: incentives, regulation and analysis for efficient investment

We consider a capacity auction in which multiple supplying firms offer bids, and an agent, the buyer, selects which bids to accept. Payments may depend on the set of bids accepted. We consider the role played by a submodularity property for the social welfare function in terms of the set of participating firms. We show how submodularity leads to good properties for the equilibrium. We illustrate this through discussion of a case where the buyer faces uncertain demand and there are separate costs incurred by the suppliers for making capacity available (reservation costs) and for delivering against the required demand (execution costs). We demonstrate that when marginal costs are constant the submodularity property holds, and in equilibrium each supplier makes a profit equal to their marginal contribution and the overall expected welfare is maximized.

Eddie Anderson (Lusheng Shao and Bo Cheng)

This talk is part of the Isaac Newton Institute Seminar Series series.

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