This is an Open Access article. You will receive access to the full text.

Rethinking the Role of Financial Transmission Rights in Wind-Rich Electricity Markets in the Central U.S.

Abstract:
Transmission congestion can cause a divergence between wholesale power prices at the individual pricing nodes where power is generated and the more-liquid trading hubs where that power is often delivered and sold. This nodal price difference is commonly referred to as the "locational basis" (or just "basis"). Because the basis varies over time, it can—if not hedged—unpredictably affect a wind plant's revenue and/or value, which increases investor risk and potentially slows deployment. We find wind plants typically face a larger and more-negative basis than do thermal generators, and hence are more-negatively impacted by congestion. Moreover, while most thermal generators can effectively hedge basis risk by purchasing conventional fixed-volume financial transmission rights (FTRs), these fixed-volume FTRs do not effectively hedge basis risk for variable wind generation. More-effective hedging mechanisms may be required to support those generators most-impacted by congestion, and to promote continued investment in variable generation resources in congested markets.

Download Executive Summary Download PDF

Keywords: Renewable energy, Financial transmission rights, Basis risk

DOI: 10.5547/01956574.44.6.jkim

References: Reference information is available for this article. Join IAEE, log in, or purchase the article to view reference data.

Published in Volume 44, Number 6 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

© 2024 International Association for Energy Economics | Privacy Policy | Return Policy