Research suggests electricity markets are using suboptimal pricing

This paper tackles a fundamental question in electricity market design that affects billions in energy costs.

Most major electricity markets (US, EU) use "Pay-as-Clear" pricing where all producers get paid the highest accepted bid. The alternative is "Pay-as-Bid" where each producer gets their own bid amount.

The European Commission argues Pay-as-Clear promotes "efficiency and transparency." But this game-theoretic analysis finds Pay-as-Bid consistently yields lower worst-case prices, even though neither mechanism dominates in all scenarios.

The key insight: while Pay-as-Clear might have better best-case outcomes, Pay-as-Bid provides better worst-case guarantees - arguably more important for critical infrastructure.

Given the scale of electricity markets, even small efficiency gains could mean significant consumer savings. Makes you wonder why the industry standard persists despite the theoretical evidence.

(Spotted via my Research Paper widget on get-alfred.ai — thought it was worth a share.)