Abstract

This paper studies the non-cooperative equilibrium of an electricity auction in which bidding firms are risk averse and have complete information. It assumes a centralized dispatch and stochastic hydraulic generation. We find that the auction allocates the energy contract to the generating firm that sets the spot market price: the thermal firm under moderate hydrological conditions and the hydraulic firm under a severe drought (rationing). In both cases the equilibrium price is greater than the regulated nodal price. Results are robust to introducing compensations for supply shortages. Finally, we find that if firms were risk-neutral they would bid the same prices and equal to the regulated nodal price, regardless of supply-shortage risk.