Bidding behavior in the Chilean electricity market

- We use a divisible auction model to explain electricity auctions in Chile.
- Main determinants of bidding behavior are spot price and contract capacity.
- A reduce-form model is estimated with Chilean data from 2006 to 2011.
- Large incumbents have lower cost of over-contracting than small firms and entrants.
- We suggest implementing measures to reduce over-contracting cost of entrants.

Contracts in power markets are usually obscure. From recently public auctions of long-term supply contracts we can obtain information on how contract prices are determined. To understand generators' bidding behavior, this paper examines the Chilean experience from 2006 to 2011. Using a divisible good auction model we provide a theoretical framework that explains bidding behavior in terms of expected spot prices and contracting positions. Empirical estimations indicate heterogeneity in the cost of over-contracting depending on incumbency, bringing evidence of significant barriers to entry.