The market clearing price will determine whether a generation company will participate in the market, and to increase its chances for that, it needs to be as well as possible. On the other hand, load serving entities (distribution companies), need to bid as high as possible to warrant inclusion in the wholesale market.
The question is: if a distribution company bids too high, and was not allowed to draw power from the market, what will happen to people who get served by the company? Will they simply lose power for an hour or so? That does not make any sense and no books or papers about deregulation directly discuss this issue
Power generation and distribution is usually done by natural monopolies or natural oligopolies and the power tariff is regulated by the local or central governments. There is no reason to believe that all this is done through competitive markets and hence pricing is usually second best pricing. Therefore you should look up this literature on second best pricing and capacity utilisation issues come with it. Incomplete Asset Markets are usually present in the energy sector financial markets according to research published by me see for e.g. the generic existence paper on my RG page but I can only cursorily refer to the relation between electricity markets and their stock markets as above. SKM QC
Only a fraction of power goes through the bidding process, and mostly not for residential customers. In Europe you may look at the reports by the regulators body: http://www.ceer.eu/portal/page/portal/EER_HOME
See also reports by http://www.acer.europa.eu/Pages/ACER.aspx
I discuss liberalized market in my book Network industries and social welfare
https://scholar.google.it/citations?view_op=view_citation&hl=it&user=8PEIbrEAAAAJ&citation_for_view=8PEIbrEAAAAJ:8d8msizDQcsC
Aldaoudeyeh,
Most formal power markets treat demand as completely inelastic, a fixed amount no matter the price. So there is little strategy in bidding as a demand, whether as the ultimate customer or as a distributor/marketer providing power to the ultimate customer. Your demand is what it is.
However, most formal power markets also have a robust bilateral market, where buyers and sellers make private deals for extended blocks of power, such as weekly 24x7, 16x5, or monthly 720 hours, or even annually. The hourly quantities associated with these long term bilateral markets are then mixed into the hourly formal power markets. As a result, many distributors/marketers have little exposure to hourly price spikes, having bought all of their power needs in the bilateral market. (These bilateral contracts are often specified as "contracts for differences.") ERCOT marketers survived a 10 fold increase in the average market price of energy for the entire month of August 2011 because of such bilateral hedging.
It is in the bilateral markets where your concern about a distributor "under bidding" is of concern. If you under bid in the bilateral market, you don't have the block of power when the markets are clearing and thus are subject to any price spikes that might occur. Our Federal Energy Regulatory Commission just started a rule making that may cover such price spikes when there is a shortage. Many pricing mechanisms use something like the value of loss load to set the price when there is a shortage, effectively using an On/Off switch for the presence/absence of a shortage. My WOLF (Wide Open Load Following, see articles on my web page, LivelyUtility.com) uses system frequency error as a measure for how severe the shortage is, raising and lowering the price gradually, in a continuous manner, though steeply.
In order to keep the light's on. the distribution company has to draw power from the grid to serve its customers, and it is allowed to do so, however it will be charged by the System Operator at real time price as developed in the ancillary market.
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