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Price Formation in Auctions for Financial Transmission Rights

Abstract:
Financial Transmission Rights (FTRs) are financial derivatives in wholesale electricity markets that are sold in auctions. The revenue collected from FTR auctions is passed through to electricity customers to reimburse them for transmission congestion payments they make in the spot energy market. On average, electricity customers' congestion payments greatly exceed auction reimbursements in electricity markets across the United States. We study the issue of auction revenue deficiency through the lens of Auction Revenue Rights (ARRs), which is the predominant mechanism used in U.S. electricity markets to distribute auction revenue to electricity customers. We demonstrate how the ARR process influences fundamental supply conditions in the FTR auction market and show how divergent auction equilibria emerge under different ARR decision-making regimes. Using market data from PJM, we find empirical evidence that variation in ARR management strategies helps explain differences between an FTR's auction price and its realized ex post value.

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Keywords: Financial transmission rights, Electricity markets, PJM, Congestion, Price discovery

DOI: 10.5547/01956574.43.3.jopg

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Published in Volume 43, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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