Falling Prices in Electricity Supply Auctions

Good News... with Caution

Abstract

By law, electricity distribution companies must sign energy supply contracts with power generators. These contracts are awarded to the best bidder through public tenders known as “electricity supply auctions.” The prices obtained in these auctions are a significant component of the final price paid by Chilean households. In the latest auction, the average price paid was US$47.6/MW, the lowest since the auctions began in 2006 and also 40% lower than the price paid in the previous auction. This is undoubtedly good news, but it is important to understand the reasons for this price decline. Was there a design flaw in the previous auctions that impaired their functioning? Are there exogenous factors that explain the lower prices? Are there underlying risks behind the lower prices that could affect the future price paid by households? This is a highly relevant public policy issue, which we explain in this article. Continue reading...