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Financial Transmission Rights Meet Cournot: How TCCs Curb Market Power

Abstract:
This paper reconsiders the problem of market power when generators face a demand curve limited by a transmission constraint. After demonstrating that the problem's importance originates in an inherent ambiguity in Cournot-Nash theory, I review Oren's (1997a) argument that generators in this situation capture all congestion rents. In the one-line case, this argument depends on an untested hypothesis while in the three-line case, the Nash equilibrium was misidentified. Finally, the argument that financial transmission rights (and TCCs in particular) will have zero market value is refuted by modeling the possibility of their purchase by generators. This allows transmission owners, who initially own the TCCs, to capture some of the congestion rent. In fact when total capacity exceeds line capacity by more than the capacity of the largest generator, TCCs should attain their perfectly competitive value, thereby curbing the market power of generators.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Transmission and Network Management; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: C72: Noncooperative Games, C70: Game Theory and Bargaining Theory: General, D44: Auctions, D43: Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, Q48: Energy: Government Policy, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, Q41: Energy: Demand and Supply; Prices, L13: Oligopoly and Other Imperfect Markets, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

Keywords: Cournot, electricity transmission, market power, electricity generation, transmission rights

DOI: 10.5547/ISSN0195-6574-EJ-Vol20-No1-1

Published in Volume20, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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