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.
Abstract. The 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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