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The Competitive Effects of Ownership of Financial Transmission Rights in a Deregulated Electricity Industry

Manho Joung, Ross Baldick, and You Seok Son

Year: 2008
Volume: Volume 29
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-9
View Abstract

In this paper, we investigate how generators� ownership of financial transmission rights (FTRs) may influence the effects of the transmission lines on competition. In order for concrete analysis, a simple symmetric market model is introduced and FTRs are modeled in two different forms: FTR options and FTR obligations. This paper shows that introducing FTRs in an appropriate manner may reduce the physical capacity needed for the full benefits of competition. Among the competitive effects of ownership of FTRs, we focus on the effects on two possible pure strategy equilibria: the unconstrained Cournot equilibrium and the passive/aggressive equilibrium. We also analyze an extension of the model: asymmetric markets. Finally, a numerical illustration of applying the analysis is presented.

Market Design for Long-Distance Trade in Renewable Electricity

Richard Green, Danny Pudjianto, Iain Staffell and Goran Strbac

Year: 2016
Volume: Volume 37
Number: Bollino-Madlener Special Issue
DOI: 10.5547/01956574.37.SI2.rgre
View Abstract

While the 2009 EU Renewables Directive allows countries to purchase some of their obligation from another member state, no country has yet done so, preferring to invest locally even where load factors are very low. If countries specialised in renewables most suited to their own endowments and expanded international trade, we estimate that system costs in 2030 could be reduced by 5%, or €15 billion a year, after allowing for the costs of extra transmission capacity, peaking generation and balancing operations needed to maintain electrical feasibility. Significant barriers must be overcome to unlock these savings. Countries that produce more renewable power should be compensated for the extra cost through tradable certificates, while those that buy from abroad will want to know that the power can be imported when needed. Financial Transmission Rights could offer companies investing abroad confidence that the power can be delivered to their consumers. They would hedge short-term fluctuations in prices and operate much more flexibly than the existing system of physical point-to-point rights on inter-connectors. Using FTRs to generate revenue for transmission expansion could produce perverse incentives to under-invest and raise their prices, so revenues from FTRs should instead be offset against payments under the existing ENTSOE compensation scheme for transit flows. FTRs could also facilitate cross-border participation in capacity markets, which are likely to be needed to reduce risks for the extra peaking plants required.

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

Friedrich Kunz, Juan Rosellón, and Claudia Kemfert

Year: 2017
Volume: Volume 38
Number: KAPSARC Special Issue
DOI: 10.5547/01956574.38.SI1.fkun
View 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.

Price Formation in Auctions for Financial Transmission Rights

Jeff Opgrand, Paul V. Preckel, Douglas J. Gotham, and Andrew L. Liu

Year: 2022
Volume: Volume 43
Number: Number 3
DOI: 10.5547/01956574.43.3.jopg
View 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.

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

James Hyungkwan Kim, Mark Bolinger, Andrew D. Mills, and Ryan Wiser

Year: 2023
Volume: Volume 44
Number: Number 6
DOI: 10.5547/01956574.44.6.jkim
View 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.

Congestion Risk, Transmission Rights, and Investment Equilibria in Electricity Markets

Simon Risanger and Jacob Mays

Year: 2024
Volume: Volume 45
Number: Number 1
DOI: 10.5547/01956574.45.1.sris
View Abstract

Financial instruments that help provide revenue certainty are fundamental for project finance in liberalized electricity markets. Improved management of locational risk caused by network congestion is becoming increasingly important with a growing share of production from geographically remote renewable resources. Nodal markets have financial transmission rights (FTRs) to enable participants to manage locational risk, but there is no evidence that FTRs have been used to support project finance. Through a stochastic equilibrium model in which market participants invest in production assets and trade risk, we show that long-term FTRs promote surplus-maximizing generation investments and reduce the cost of capital. Investors pair them with energy price hedges and thus protect themselves against both types of risk. Our results suggest that altering the definition and allocation of FTRs to match the needs of project finance, e.g., by enabling new generators to procure a long-term right at the time of interconnection, could help ensure a complete risk market and encourage efficient investments.

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