Welfare Effects of Implicit Auction on Interconnector Capacity: Evidence from Japan

Abstract

Abstract This study examines the welfare impact of implicit auction on the interconnector transmission capacity in Japan. The first-come-first-served rule allows incumbent generation or retail firms to exercise vertical market power by withholding the interconnector capacity and create congestion in the day-ahead market. The implicit auction allocates all the capacity simultaneously with energy in the day-ahead market. It prevents them from strategically reserving their physical transmission capacity ex ante and increases cross-zonal trade volumes in the day-ahead market. Increased trade reduces the price gap between the import and export zones. I use machine-learning methods to estimate the welfare impact of implicit auction. I predict the counterfactual market outcomes without implicit auction, and find that the trade effect of implicit auction is over $ 200 million per year. The study also finds that implicit auction does not necessarily reduce the price gap between export and import zone because it not only has a trade effect but also a counteracting volume effect. JEL codes: L94, Q41