“Pay as Bid” and “Pay as Clear”
Note: As part of the recruitment process for trail participants; TRANSITION developed extensive resources, explaining key concepts of flexibility markets to a wide ranging audience. Our plain English explanations are a great resource for those interested in replicating our trials.
When you put a bid in to deliver a Flexibility Service, there will be other people who are doing the same thing – bidding a price for the service they are offering to provide.
To get the amount of flexibility SSEN needs, we will often need to buy the service from more than one seller. We look at a number of factors to choose which bids we will accept, with an important one being price.
So assume, just as an example, two different bidders have their bids accepted for an auction – i.e. they both ‘win’ the auctions – they may both have made different bids. Company A may have bid at £0.20/kW, but we also need more flexibility than they can provide, so Company B also wins the auction but, their bid was a little higher at £0.30/kW (please note this example does not reflect real market prices).
We have two choices as to what we pay them for providing their flexibility.
1. Pay as Bid
We pay them the two different amounts they bid at – so company B gets more money for providing their flexibility than Company A does. This is what we call ‘Pay as Bid’, because the bidders are literally paid the price that they bid at.
2. Pay as Clear
Alternatively, we can pay them both the higher amount of £0.30/kW. Even if more than these two bids were accepted, they would all still be paid the price of the highest accepted bid.
In economic terms that is they get paid the marginal clearing price in the market.
Which is TRANSITION applying?
One of the things we want to explore in the trials, is the impact that these two different approaches have on market liquidity and competition as well as ‘bidding behaviour’.
During Trial Period 1 we will only be running auctions on a ‘Pay as Bid’ basis. We will however be running some auctions as ‘Pay as Clear’ in Trial Periods 2 & 3.
We will tell you when we advertise an auction which of these settlement/payment approaches we will take.