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Ontario's Auction Market for Financial Transmission Rights: An Analysis of its Efficiency

Abstract:
Financial transmission rights (FTR) are financial products that entitle their holder to receive a payment based on the degree of congestion in a transmission system. In many liberalized electricity markets, FTR are sold at auction by the local electricity system operator. This paper addresses several questions about the performance of FTR auctions in Ontario's restructured electricity market, including whether auction market clearing prices approximate realized payouts and whether there is any evidence that the competitiveness of auctions, as measured by the number of bidders, affects the forward market unbiasedness or informational efficiency of the auctions. The paper finds that the auction process is inefficient in the sense that market clearing prices are substantially and systematically lower than realized payouts, resulting in substantial transfers away from consumers. However, there is some evidence that the auction market is more efficient when there are three or more bidders.

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Keywords: Electricity market; Liberalization; Financial transmission rights; Forward market unbiasedness; Informational efficiency; Auction competitiveness; Ontario

DOI: 10.5547/01956574.39.1.dolm

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Published in Volume 39, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.