Management of Uncertainty in Supply Contract Auctions Contribution to the Panel "Hedging Risk and Uncertainty in Electricity Markets"

Uncertainty management becomes a key challenge in the restructured electricity industry as the implementation of market processes increases the sources of uncertainty beyond those faced in the former vertically integrated industry. We focus on the assessment and management of uncertainty in the area of contracting for short- and mid-term supply contracts. Such contracts are drawn up with the successful sellers in an auction held to determine the lowest priced supplies to meet the requirements of various classes of load. The primary focus of the analysis is the auction design product definition issues and their impacts on the resulting outcomes. The high prices attained in the 2006 Illinois Electricity Auction reflect the impacts of shifting uncertainty from the distribution companies to the sellers of the needed electricity supply. We assess the impacts and provide the insights we obtain to improve uncertainty management in short-and mid-term contracting for electricity.