A more efficient procurement mechanism for reserve capacity in the German market for balancing power

From auction theory we know that multi-unit, pay-as-bid auctions in general lead to bid shading and thus to an inecient allocation. This result is supported by historical data from the German market for balancing power, which show that bidders bid well above their actual costs. In contrast to the pay-as-bid auction, the Vickrey auction has the dominant strategy property and bidders reveal their true opportunity cost. Consequently, the Vickrey auction allocates eciently. In this article we show how this auction format can facilitate an ecient capacity procurement process in the German reserve market.