The new Enduring Auction Capability (EAC) operates as a pay-as-clear market. At a high level, this means the highest price accepted in each service in the auction should be the price that ESO will pay to (or receive from) accepted participants.
However, since the launch of the EAC, there have been instances where the clearing price does not align with bid prices. On some days, such as on November 7th, it can result in outcomes that make no immediate sense. This is due to the auction’s new algorithm, which clears the whole auction as a whole.
The new clearing algorithm can produce results that are not immediately obvious
In EFA block five on November 7 2023, Dynamic Containment High's clearing price was -£7.56/MW/hour. This is significantly lower than in any other EFA blocks since the launch of the Enduring Auction Capability. The highest price accepted for a non-zero-volume order was bid in at £3.11/MW/hour, and the lowest was -£1.75/MW/hour.
In addition, 388 MW of bids were rejected for being too expensive despite being priced lower than £3.11/MW/hour. So, why did Dynamic Containment High clear at -£7.56/MW/hour?
Co-optimization in the Enduring Auction Capability sets clearing prices for connected services
For this EFA block, all volume accepted for Dynamic Containment High was from baskets also including volume for Dynamic Containment Low (called ‘looped’ bids).
Within this EFA block, the ESO required more Dynamic Containment Low volume than Dynamic Containment High. The 615 MW requirement of Dynamic Containment High could be obtained from ‘looped bids’ containing both high and low services. This then provided 754 MW of Dynamic Containment Low volume. Therefore, an additional 173 MW of low volume was required from baskets that did not contain Dynamic Containment High. This combination led to Dynamic Containment High’s seemingly perverse clearing price.
Looped bids are assessed on their total overall value and not individual elements
The clearing price for Dynamic Containment Low was £12.72/MW/hour. This was based on the highest price needed to procure all required volume. This price came from a Dynamic Containment Low-only bid provided by Habitat Energy.
All accepted bids received this price for Dynamic Containment Low, including those looping the high and low services together. However, this price was greater than the total value (combined between high and low) asked for by every looped bid that could provide volume to clear the high service, also known as obtaining ‘surplus’ value.
Despite having individual prices by service, looped bids are treated as having just one price for all looped services. This means prices can be cleared in a way that provides zero surplus value to the most expensive bid.
The Dynamic Containment High price of -£7.56/MW/hour resulted from satisfying the requirements of looped bids
Flexitricity provided the most expensive looped accepted bid through unit AG-FLX00L. This had a price of £2.58/MW/hour for 2MW of Dynamic Containment High and the same for 2MW of Dynamic Containment Low. Within the auction, this is treated as one bid with a price of £5.12/MW/hour for the combination of the two.
Because the unit would receive £12.72/MW/hour for Dynamic Containment Low, it could still receive its total bid value if Dynamic Containment High cleared as low as £-7.56/MW/hour. All other accepted baskets for these services in the EFA block were cheaper overall and received an uplift in value from the clearing prices.
The clearing price was not a result of any of the Dynamic Containment High bids on their own but of the combined value of each looped high and low bid.
This was a possible scenario with looped bids before the launch of the EAC, aside from the fact that clearing prices were previously floored at £0/MW/hour. Because negative clearing prices are now allowed, this allows the auction to clear more efficiently, thereby reducing prices overall.
Co-optimization across different services makes this even more complicated
The Enduring Auction Capability clears at the cheapest overall cost while meeting the total bid value of all accepted volume. When requirement volume is skewed toward one service, with lots of looped bids, this can create scenarios such as November 7th.
However, clearing prices can become even more complicated. Because the EAC allows looping (or ‘splitting’) between different services, this may mean that prices accepted in one service may create seemingly perverse outcomes in another. Diagnosing how a price in any one service has arisen is becoming increasingly difficult.
