Efficiency of continuous double auctions in the electricity market

Abstract

Intra-day electricity markets are considered as important mechanisms to reconcile short-term fluctuations of energy production with consumption. This even gains in significance in systems with heavy intermittent production at virtually no variable costs, such as wind energy. In Europe, intra-day markets are often designed as continuous double auctions where bid and ask orders are collected continuously, ranked by price and time of arrival. Although this market type can be considered as delivering more or less efficient results, the trading process itself is time-consuming. This poses the question whether continuous markets yield comparably good results when flexibility of market participants to change their schedules at short notice is costlier than having changed them earlier. We apply an extended zero-intelligent-trader simulation model to assess the impact of costly flexibility on market outcomes. We find that costly flexibility with a correspondig demand for flexibility may negatively affect the efficiency of continuous double auctions. For the energy market, this could imply that the markets' ability to exploit flexibility is systematically limited.