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Tuesday, July 29, 2025

Pay-as-Bid Vs. Pay-as-Clear: Complex RTO Payment Methods for Power Markets Not Fair or Necessary, According to Op-Ed: (The Solution May Be Tweaks Rather Than a Switch IMO)


       There has been significant criticism of the Regional Transmission Organization (RTO) power market manager, PJM Interconnection, for raising prices at its annual capacity auction. In PJM’s 2024 auction, capacity prices rose to $269.92/MW-day, a tenfold jump from $28.92/MW-day in 2023.

     According to Frank Lasse of Truth in Energy and Climate, a group of climate skeptics and realists, argues that the pay-as-clear method of determining forward power prices is absurd and illogical, as well as unfair and unnecessary. He and others have argued that there is a better way, known simply as pay-as-bid. He claims that growing demand from data centers and the premature shutdown of reliable coal and gas plants are the main reasons for the potential power reserve capacity inadequacies looming on the horizon. He blames the low cost of renewables, which can easily outbid fossil resources due to the absence of fuel costs, although upfront costs are much higher for renewables. That problem increased with increased renewables deployment due to the Inflation Reduction Act, which will not be the case going forward due to repeals. Solar and wind deployment will also drop when subsidies are dropped in 2026. Those natural gas and coal resources are still needed for backup, daily spikes, and seasonal spikes, so making them uncompetitive, less profitable, and prematurely retiring them is not in the best interests of power grid reliability. The Trump administration has ordered a few planned coal plant retirements to be delayed but it is unclear if those actions were really needed. At the request of PJM, the DOE recently issued an emergency order to allow a 400MW oil-fired unit at a Baltimore power plant beyond its operational limits. The unit can only run a certain number of hours per year due to air pollution concerns, and PJM expects to keep it within those limits. The planned retirement has been delayed by up to four years to 2029.

     Lasse notes that the current rules prioritize intermittent electricity and unnecessarily disadvantage on-demand energy, mainly natural gas. The rules allow them to take away market share from the “reliables,” he argues.

California, the green poster child, pays 31.23 cents per kWh, nearly double the national average of 16.88 cents (EIA, May 2025). Switching to a pay-as-bid system, where each generator gets their actual bid price and stop adding wind and solar, will stop this insanity and save ratepayers a bundle.”

     The problem with his solution is that we are not going to stop adding wind and solar, since they are desirable for reducing emissions. We can, however, slow the additions of wind and solar to achieve better overall integration of them into the grid. Power markets should be sensitive to the needs of needed gas generators in light of the advantages given to wind and solar. One might say we need some incentives for renewables, but not at the expense of needed reliable generation. Perhaps a solution that shares benefits on agreeable terms.  

     Lasse argues that a pay-as-bid mechanism would induce competition and lower power prices for consumers.

It’s time RTOs like PJM and MISO ditched this pay-as-clear racket. FERC should greenlight a shift to pay-as-bid, forcing generators to compete on real costs, not game the system. Let’s stop overpaying for power and prioritize affordability and reliability.”     

     I am not sure which would be best, but needed reliable power production should not be disadvantaged and made to be unprofitable, while highly subsidized intermittent power is advantaged. While there are mechanisms to pay reliable energy generators for retaining reserve capacity, these can be inadequate. In particular, I believe that the most efficient combined-cycle natural gas plants should be running close to maximum capacity factors, as that is the cheapest form of widely available, reliable energy.   

      In a pay-as-bid system, a reliable power generator may win a bid at a higher rate than an unreliable power generator. Thus, they could win back some market share from subsidy-propped renewables. Both will be paid as bid. Thus, the reliable energy provider can be valued higher for providing reliable power. In a pay-as-clear system, all are paid the highest bid. Thus, in such a system, the unreliable provider is paid the same as the reliable provider. In a pay-as-bid system, the unreliable provider would be paid less.

In economic terms that is they get paid the marginal clearing price in the market.”

     Thus, along with getting subsidized, unreliable energy sources are getting paid at reliable energy sources' prices.

 

Pay-As-Clear

     According to Flex Pwr:

Pay-as-Clear is a pricing mechanism commonly used for auctions of homogeneous goods, such as commodities, shares (e.g., emissions), or electricity. In this process, a uniform price applies to all buyers and sellers at the conclusion of the auction, regardless of the bids they initially submitted or accepted. This is why it's also referred to as uniform pricing.”

The price is determined by accepting bids until supply and demand are identical, i.e. the market is cleared. In practice, bids are usually accepted until a set quantity of the good has been auctioned off. In sales auctions, the highest price accepted then applies; while in purchase or procurement auctions, the lowest price awarded applies.”

 





Pay-As-Bid

     Again, according to Flex Pwr:

In Pay-as-Bid auctions, each buyer and seller is paid the price they specified in their successful bid. This means that prices below the highest bid are possible at sales auctions - at least in theory - and prices above the lowest bid at purchase or procurement auctions.”

     Pay-as-Clear is usually considered to lead to more volatile pricing and higher prices for consumers, but pay-as-bid could also produce price volatility. An argument against pay-as-bid is that it would cannibalize renewables by making them less profitable. Pay-as-clear seems to solve this by instead making reliable energy less profitable. I am thinking some sort of combination approach would be best, more toward ‘splitting the difference.’ It has been argued that pay-as-bid would not lower consumer costs but raise them in the medium to long term. Others have argued that due to marginal pricing, both setups would result in similar consumer costs. Due to the guessing of clearing prices, the pay-as-bid method is prone to misallocation. Higher transaction costs mean that less capital will be available for efficiency improvements, preventing lower prices for consumers.  

     As can be seen below in a comparison of both systems, there are some important pros of pay-as-clear that should be considered and some important cons of pay-as-bid that should be considered. Thus, I would say that changing from ‘clear’ to ‘bid’ is not warranted. However, I also believe that while renewables should have some propping, they should not be able to cut into the profits of reliable energy generators. Perhaps renewables could be paid not the highest bid price as in pay-to-clear and not the bid price as in pay-as-bid, but somewhere in between.  






     According to a 2025 mathematical analysis done by the Computer Science Department at Aarhus University in Denmark, the pay-as-bid system will always result in lower consumer prices. They don’t seem to take into account the effect on efficiency investments.

AbstractThe design of energy markets is a subject of ongoing debate, particularly concerning the choice between the widely adopted Pay-as-Clear (PC) pricing mechanism and the alternative Pay-as-Bid (PB). These mechanisms determine how energy producers are compensated: under PC, all selected producers are paid the market-clearing price (i.e., the highest accepted bid), while under PB, each selected producer is paid their own submitted bid. The overarching objective is to meet the total demand for energy at minimal cost in the presence of strategic behavior. We present two key theoretical results. First, no mechanism can uniformly dominate PC or PB. This means that for any mechanism M, there exists a market configuration and a mixed-strategy Nash equilibrium of PC (respectively for PB) that yields strictly lower total energy costs than under M. Second, in terms of worst-case equilibrium outcomes, PB consistently outperforms PC: across all market instances, the highest possible equilibrium price under PB is strictly lower than that under PC. This suggests a structural robustness of PB to strategic manipulation. These theoretical insights are further supported by extensive simulations based on no-regret learning dynamics, which consistently yield lower average market prices in several energy market settings.

     They also note in their conclusion:

Our experimental evaluations support our theoretical findings, indicating that online learning dynamics consistently lead to lower average unit prices under PB compared to PC. An intriguing direction for future research is to derive formal price guarantees for both PB and PC under the assumption that all producers employ no-regret online learning algorithms to determine their bids.”

     I believe that tweaks in the formula for determining capacity auction pricing should take into account the financial concerns of both renewable and reliable energy producers, since we need both. In practice, I think that would likely involve advantaging renewables a little less and advantaging reliables a little more.

  

 

 

References:

 

Op-Ed: Pay-as-bid: A smarter way to power the grid without getting fleeced. Opinion by Frank Lasee.  Truth in Energy and Climate. The Center Square. July 28, 2025. Op-Ed: Pay-as-bid: A smarter way to power the grid without getting fleeced

Pay-as-Clear vs. Pay-as-Bid in Power Trading. Flex Pwr. Pay-as-Clear vs. Pay-as-Bid in Power Trading | Definition

Rethinking Pricing in Energy Markets: Pay-as-Bid vs Pay-as-Clear. Ioannis Caragiannis, Zhile Jiang, and Stratis Skoulakis. Department of Computer Science, Aarhus University, Denmark. July 8, 2025. Rethinking Pricing in Energy Markets: Pay-as-Bid vs Pay-as-Clear

“Pay as Bid” and “Pay as Clear”. Transition. Blog. “Pay as Bid” and “Pay as Clear” | SSEN Transition

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