Auctions and Future Energy Systems: Micro auctions for distributed generation with flexible zones

1. Auctions and Future Energy Systems: Micro auctions for distributed generation with flexible zones Thomas Greve and Michael G. Pollitt (tg336@cam.ac.uk and m.pollitt@jbs.cam.ac.uk ) 2nd Interdisciplinary Workshop on Smart Grid Design and Implementation University of Florida 29 March 2014

2. The Autonomic Power Project • This project is part of: • EPSRC Autonomic Power Project. • Started in 2011 and ends in 2016. • 8 universities and 9 industrial partners. • This projectfocuseson the electricity network of 2050: • the energy networks of the future will be far more difficult to manage and design than those of today, for technical, social and commercial reasons.  • need for ’self-*’ network. Source: APS (2011)

3. Four key areas of research • Self* network operation and control. • Resilience and risk management. • Active participation of consumers. • Autonomic economics. - WP1: Economic thinking zones for future complex power systems. - WP2: Micro auctions for distributed generation with flexible zones.

4. The challenge

5. Our contribution

6. The Beauty of Auctions • Fairness: select the outcome that achieves a certain fairness criterion in utility. • Budget-balanced: implement outcomes that have balanced transfers across players. • Efficiency (truth-telling): select the outcome that maximizes total utility. • Revenue maximization/Cost minimisation(typically referred to as optimality): select the outcome that maximizes revenue to a seller/minimizes costs to a buyer. • Pareto optimality (alternative): occurs when no one can be made better off without making someone worse off. • With truth-telling: the winner will always be the person with the • highest valuation of the good. Therefore, the item belongs to • the person/group who values it most, social welfare is optimised.  

7. WINNER! Receives $400 $700 $400 $500 $300 Second-price sealed-bid auction • All sellers submit bids. • Seller submitting the lowest bid wins and gets paid the secondlowest bid. • Bidding strategy is easy • Bidding one’s true valuation is a dominant strategy. • Intuition: • The amount a bidder pays is not dependent on her bid.

8. Uniform price auction • Also known as a the "clearing price auction“. • A multi-unit auction. • A number of identical units are sold for the same price. • In theory, the uniform-price auction provides an incentive for bidders to bid insincerely (unless each bidder has demand for only a single unit). • An inefficient equilibrium. Example revenue auction • Consider a situation in which there are six units (K =6) to be sold to three bidders and the submitted bid vectors are • b1 = (50, 47, 40, 32, 15, 5), • b2 = (42, 28, 20, 12, 7, 3), • b3 = (45, 35, 24, 14, 9, 6), • b = (50, 47, 45, 42, 40, 35), next is 32. The market-clearing price is 32. Bidder 1 wins three units and pays a total of 3*32 = 96. Bidder 2 wins one unit and pays a total of 1*32 = 32. Bidder 3 wins two units and pays a total of 2*32 = 64.

9. Proxy agent • The proxy agent will be used: • as an aggregator of bids for a number of different small-scale renewables. • to determine the seller’s Willingness To Accept (WTA) and therefore, compute the bidders optimal strategy. The optimal strategy for a seller is to tell the proxy agent its WTA. • A proxy agent is an agent or software which submits bids on a bidder behalf. • The bid is decreased by a minimum increment (in theory conducted with negligibly small bid increments) until the second-lowest submitted proxy bid is exceeded by another bid. • The bidder who submitted the lowest proxy bid wins the object and receives the price that is equal to the second-lowest (proxy) bid.

10. Why auctions! • At the moment the auction is not efficient. • At the moment there is no variation in bids to help and handle special groups (like small scale suppliers). • Active use of proxy agents - the optimal bid.

11. Why flexible zones! • At the moment there are no flexible zones! • Can secure demand equal to supply within an internally unconstrained area: • Place a zone in the right place, ensure local supply=demand. • Can secure that lowest cost suppliers deliver. • Therefore, help the auction to secure welfare improvement or optimality.

12. Autonomic Power Project • Existing (distribution) networks are not ready to cope with the uncertainty and complexity in future networks and far away from being ready for the complexity which might exist by 2050. • An efficient auction. • Flexible zones. • We need a method to help and handle small scale suppliers. • We need an auction and zoning design to secure truth-telling (”efficiency”) and an efficient allocation (”optimality”) in all zones. Aim: lowest possible consumer prices and welfare improvement

13. Tools - Flexible zones and auctions • To operate with flexible zones • improve initial zones and use flexible zones to find lowest cost combination of suppliers (i.e. generators or DR aggregators). • Locational pricing with competition can provide larger benefits. • To design an auction that can take advantages of the flexible zones and handle or use small scale suppliers. Rules for suppliers: • A supplierhas to be signed up for auction if it wants to participate. • A proxy agent will aggregate all small small-scale renewables and submit bids. • If a small-scale supplier is not connected to a proxy agent, it may sign-up for the auction. If a supplier is not signed up, the supplier cannot get access to a distribution line. • Quality of service/subscriptions - to respond to the unpredictable nature of renewable generation: • Gold subscription = electricity delivered when demanded • Silver subscription = electricity delivered within 15 min • Bronze subscription = electricity delivered within 30 min Assumption: Active consumers

14. Auction design 1 – English auction with proxy bidding (ebay auction)

15. Initial zoning It is March 26, auction starts for March 26, time interval 6-6.30am 8 suppliers or 8 proxy agents have signed up for auction: Zone 1 • Gas 1 • Wind 1 • • SSS 1a • SSS 1b • ND 1 SSS: small scale suppliers ND: negative demand • • ND 2 Zone 2 • Wind 2 • • Gas 2 • SSS 2b • Wind 2a Zone 1 10 MWh Gold Demand 20 10 MWh Silver Zone 2 10 MWh Gold Demand 20 10 MWh Silver

16. Initial zoning – proxy agent bids • Consider the bidding process for Gold in Zone 1. • Two identical items offered for sale – a licence to deliver 1 MWh Gold and a licence to deliver 1 MWh Gold, in 10 simultaneous auctions. • Assume that each bidder only desires one item (in each auction). • Gas 1 instructs her proxy to bid down to £163 per MWh for the item, and wants three MWh. • Wind 1 instructs her proxy to bid down to £120 per MWh, and wants three MWh. • SSS 1a instructs her proxy to bid down to £123 per MWh, and wants that it wants five MWh. • SSS 1b instructs her proxy to bid down to £122, and wants three MWh. • The reserve price is set to £165 per MWh.

17. The rules of the auction • Every bidder has to submit bids (/values) to a proxy agent. Each bidder can make one bid in each auction. • Multi-unit action. The auctioneer looks at all the bids and divides the auctions (the 10 auctions) after highest valuations. • The two lowest proxy bidders win one item each at a price that is an increment below the highest losing bid.

18. Initial zoning, zone 1 – submitted bids Table 1 Submitted bids in zone 1, auction 1 • Winners: Wind 1 and SSS 1b (win one MWh each). • Price: £122.99 per MWh.

19. Zone 1 - result • Result • Auction 1: Wind 1 and SSS 1b win one MWh each. • Auction 2 and 3: the same result. • Auction 4 and 5: Gas 1 and SSS 1a win two MWh each, price of £165 per MWh. • Auction 6-10: No bidders. Remember Table 2: Winning bidders and allowed price, zone 1, Gold

20. Zone 2 - result • Result • Auction 1: Wind 2 and SSS 2b win one MWh each. • Auction 2-7: the same result. • Auction 8-10: Gas 2 and SSS 2a win three MWh each, price of £160 per MWh. Notice Table 3: Winning bidders and allowed price, zone 2, Gold • Note • Wind 1 and SSS 2b can deliver extra 4 MWh.

21. New zoning? • The APS will self-optimise and self-configure if it can see a lower cost network. • Assume that all bidders can deliver to consumers in both zones, and physical constraints allow this. • Suppose that it is possible to combine Wind 1, Wind 2, SSS 1b and SSS 2b in a new zone. New zone Old zone 1 • Gas 1 • Wind 1 • • SSS 1a • SSS 1b • ND 1 • • ND 2 Old zone 2 • Wind 2 • • Gas 2 • SSS 2b • Wind 2a

22. New zone Table 4: Winning bidders and allowed price, new zone, Gold Table 5Result with and without flexible zones, new zone, Gold

23. Advantages/Disadvantages of the design Disadvantages • Difficult to explain the second-price rule, but with proxy bidding it makes sense. • Dynamic auction, rounds, but with unlimited computerpower this disadvantage is eliminated. • Not a package auction. • Have heterogeneous – Gold, Silver and Bronze. Is there a better auction? Advantages • The Autonomic Power Project idea is in the auction design. • The auction design means that the auctioneer does not have to choose the prices before learning bidders’ preferences. • The auction allows bidders to submit bids on more variables – Gold, Silver, Bronze, Reserve, Big consumers etc. • The auction is efficient. • We can help, handle and control small-scale renewables. • Active use of proxy agents promote competition and makes the second-price rule interesting. • Gives the consumers more options – consumers participation (washing machine). • Day-Ahead auction and Real-Time Market can work together.

24. Auction design 2 – Package Clock Auction (telecom auction)

25. Spectrum sale Source: DotEcon and Analysys Mason, 2009

26. Package Clock Auction Source: Dotecon (2009)

27. Initial zoning, zone 1, the lots • Lots to auctioned – two categories • Available if the network self-optimise and self-configure. • Only deliver to initial zone = penalty. Table 6: Number of lots offered for sale and reserve prices per lot Table 7: Penalty for bids on lot Gold1-3 and lot Silver1-3

28. Principal stage – primary round • A clock auction. • Promote price discovery. • Gives a sense of what the prices are and possible package to win. • Bid increments together with activity rules yield higher efficiency. Table 8: The clock auction

29. Principal stage – supplementary round • Asingle round opportunity - best offer for all available packages. • Asealed-bid round. • Subject to caps. • Can fully express their preference for packages of lots/express its true value for these packages. Table 9: The supplementary round

30. Winner determination and base prices • Vickrey-Clarke-Groves (VCG) mechanism, a truth-telling mechanism. Table 10: All bids made in the auction Table 11: Lowest value combination

31. Assignment stage • Will determine the specific assignment of lots to each winning bidder, subject to the number of lots won in the principal stage. • Is there because of the restriction on line capacity lots Gold 1-3 and Silver 1-3 may be more desirable. • A sealed-bid round. • Maximize total value across all winning bidders. Table 11: All bids made in the auction Table 12: All bids made in the auction

32. Final assignment and allowed price for desired lots • SSS 1a and SSS 1b want the same package. However, SSS 1a has submitted the highest price reduction. SSS 1a wins Gold 1-3 and Silver 1-3. • Wind 1 and SSS 1b pay zero. Remember Table 13: Winning bidders and allowed price for desired lots SSS 1a’s base price is £882. First, according the VCG mechanism SSS 1a’s price has to be reduced by £1, SSS 1b’s bid. Second, SSS 1a has to pay a penalty of 1% for both Gold and Silver lots. SSS 1a pays a price of (£882-£1)*0.02 =£18.

33. Zone 2 Notice Table 14: All bids made in the auction Table 15: Winning bidders and allowed price for desired lots, zone 2

34. Zone 2 and new zone Table 16: Winning bidders and allowed price for desired lots, Zone 1 and 2 Table 17: Winning bidders and allowed price for desired lots, new zone

35. Advantages/Disadvantages of the design Disadvantages • Dynamic auction, rounds, but with unlimited computerpower this disadvantage is eliminated. • Greater efficiency. Advantages • The Autonomic Power Project idea is in the auction design. • The auction design means that the auctioneer does not have to choose the prices before learning bidders’ preferences. • The auction allows bidders to submit bids on more variables – Gold, Silver, Bronze, Reserve, Big consumers etc. • A package auction. • We can help, handle and control small-scale renewables. • Active use of proxy agents promote competition and makes the second-price rule interesting. • Gives the consumers more options – consumers participation (washing machine). • Day-Ahead auction and Real-Time Market can work together.

36. Conclusion Design 1 – English auction with proxy bidding • (1) Efficient, (2) Not a package auction Design 2 – Package Clock Auction • (1) Greater efficiency, (2) A package auction SO – • If efficient – placing the MWhin hands other than those who value them the most. • the flexible zones secure – “the right supplier” is matched with “the right consumer” • lower prices • Pareto improvement or maybe optimality (2) Proxy agent: • Can handle and help small scale suppliers and promote competition • Secure the optimal WTA

37. Next Steps • Working on different auction designs. • Need to test our flexible zoning for feasibility. • Need to test our auction designs for feasibility. • Mechanism for market power. • A software to check for collusion – filter.