A Reverse Auction to Conserve Kilowatts

The Missouri Department of Natural Resources on July 28th ran what may be the first-ever?online reverse auction for energy efficiency grants.? The state allocated $3 million of American Recovery and Reinvestment Act funding in a series of three one-hour auctions by having 23 pre-qualified businesses bid on a $/kWh saved basis for projects that were expected to enhance energy efficiency. Grants with fixed dollar amounts were awarded to the bidders who promised the best (conservation) bang for the (grant) buck.? For example, two $500,000 grants were awarded to AmerenUE and The Gasket Guy because they (by bidding 3.25 cents/kWh) effectively promised that they would each be able to demonstrate conserving more than 15 million kilowatt hours.

Peter Cramton and I have written before about how auction rules (in particular regarding affirmative action) can affect auction competition.? Having enough serious bidders show up to bid is particularly important.? In fact, in an article which has become an instant classic,?Jeremy Bulow and Paul Klemperer have shown that most sellers would be better off having one more serious bidder show up to bid than having more market power over the existing set of bidders.

One of the most powerful ways that sellers can impact the degree of bidding competition is by reducing the number of items being auctioned.? If you are auctioning two widgets with a simultaneous ascending auction, the price is determined by the third-highest bidder.? If you auction four widgets, the price of all four widgets will be determined by the fifth-highest bidder.

Years ago after taking my daughter to see Seusical, the Musical, the cast came on stage and auctioned an autographed cap to help the AIDS charity Broadway Cares.? The final two bidders might have gone as high as $700 and $750.? After selling the cap to the high bidder for $750, the savvy auctioneer (who might have just played the Cat in the Hat) added that the cast had already signed a second hat and would be happy to sell that to the second highest bidder for $700.? Even though it was all for a good cause, the high bidder had reason to feel ill-used.? If the cast had simultaneously auctioned the two caps simultaneously, the highest two bidders would only have had to outbid the third highest bidder who dropped out substantially earlier.

The auction for four $250,000 grants was interesting, however, because it shows that simultaneously auctioning more things doesn’t always mean a poorer outcome for the seller.? The Missouri auction for the four smaller awards was even more competitive with the winners promising to deliver future conservation for only 2.75 cents of grant for every kWh conserved.? Even though there were twice as many grants being offered – which would tend to depress the auction price – there were more bidders willing to bid on delivering a smaller total energy savings.? Even at this lower price per kilowatt hour, each of these smaller grant recipients were promising to demonstrate only about 9 million kilowatt hours saved.? It also may have helped that this auction happened?after the larger auction so that bidders who were shut out before realized that they had to bid more aggressively.

Overall, across three different auctions the averaged promised price-effectiveness was 3.97 cents per kilowatt hour of saved energy.? This compares favorably “to recent point estimates of the average cost of other utility energy efficiency programs, which range from 4.7 to 13.3 cents per kilowatt-hour.” (Auffhammer, Blumstein, and Fowlie 2008).

Of course, there are many a slip between cup and lip.? Promised and realized energy savings may be very different things.? The?grant guidelines talk a tough game when it comes to “measurement and verification” of grant recipients who must complete their projects by January 31, 2012.? But this verification task would be true under any grant allocation system.? For now, the great state of Missouri (the only state with two Federal Reserve banks) has shown that competitive auctions are a feasible way to get the most out of our stimulus money.? (Now if only the Treasury would run with the reverse auction idea as a way to value?troubled banking assets).


Dan

The problem with more usual auctions - where the price for, say, broadcast spectrum usage, or development land - is the seller is the only winner. Not the customer of the bidder (phone network, apartment buyer). This is just like 'large' fines for rogue banks etc.

UK government auctioned off the 3G spectrum and got a ton of cash. Great. For the government - this will never trickle down as IDK a ?3 saving on tax or whatever [even if it does, dear readers, we know as it's unnoticed it won't be visible or have any value to us as we can't see it's difference] For the 3G company, they need to recoup that cash. From us. By much higher prices. Auction land off, we get property inflation based on nothing.

Similarly, these record fines we read about oh so often are misleading- who is being fined? Certainly not the wrong-doers, ultimately not the shareholders. No, it's their customers on the street, you and me. Higher fines, higher commission, business rates, fees etc.

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Calvin Graham

This reminds me of the "Not the nine o'clock news" stamp auction sketch where two people at an auction furiously bid over a rare Penny Black (?) stamp. The bidding goes on and on but finally one person finally succeeds. Then the auctioneer reveals the next item for auction: "a second penny black"

Simon Farnsworth

Actually, Dan, outside of monopoly situations, you don't pay higher rates, fees, commission etc if a business is fined.

If the market is competitive, a business that tries to raise prices as a consequence of being fined loses customers to other businesses in the same market, and ends up making less money overall, thus making it harder to pay the fine, not easier.

Thus, the net effect of fining a business is not to punish the customers for the products and services the business sells, but to make other businesses in the same market (who aren't breaking the law and paying record fines) better able to compete. In theory, at least, this makes up for the extra costs they've incurred by following the law, and results in it being more expensive to break the law than to follow it.

Bret Grady

As CEO of Procurex, Inc (www.procurexinc.com) I am proud to tell you that this auction was run on our proprietary energy procurement platform. The success of this event relied heavily on pre planning, bidder training, and clear and concise specifications. All of the rules for the auction were communicated to every bidder with mock auctions taking place prior to the "live" event. Making sure every bidder fully understands the process and sees that it is fair and transparent is vital to a successful outcome.

arny romine

they must think that the other companys will see the benefit of energy savings which will give them more bang for the buck