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Introduction of Nodal Pricing into the new Mexican Electricity Market through FTR Allocations

Abstract:
The change from a subsidized zonal pricing system to a full nodal pricing regime in the new Mexican electricity market could improve the efficiency of electricity system operation. However, resulting price modifications might also swing surplus across producers and consumers. In this paper, we calculate nodal prices for the Mexican power system and further analyze how allocations of financial transmission rights (FTRs) can be used to mitigate resulting distributional effects. The share of FTRs to be allocated to different generation plants and loads is studied as a second step of an electricity tariff subsidy reform agenda that includes, as a first step, the change to nodal pricing and, as a third step, the reformulation of actual regressive subsidies in a progressive way. We test our model in a realistic nodal price setting, based on an hourly modeling of the Mexican power system.

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JEL Codes: Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources, Q52: Pollution Control Adoption and Costs; Distributional Effects; Employment Effects, D47: Market Design, D21: Firm Behavior: Theory, L50: Regulation and Industrial Policy: General, L51: Economics of Regulation

Keywords: Financial transmission rights, nodal prices, congestion management, electricity, Mexico

DOI: 10.5547/01956574.38.SI1.fkun

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Published in Volume 38, KAPSARC Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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