Financial Transmission Rights

Rosellón, Juan; Kristiansen, Tarjei

doi:10.1007/978-1-4471-4787-9

Cited by 32 publications

(5 citation statements)

References 111 publications

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“…The actual network configuration used for dispatch (and thus for calculating LMPs) is dynamic, changing due to, for example, unforeseen transmission line outages throughout the period when the FTRs are valid financial obligations. For a comprehensive review of FTR auction theory and mathematical formulations, see Rosellon and Kristiansen (2013).…”

Section: Related Literaturementioning

confidence: 99%

Price Formation in Auctions for Financial Transmission Rights

Opgrand¹,

Preckel²,

Gotham³

et al. 2022

The Energy Journal

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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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Section: Related Literaturementioning

confidence: 99%

Price Formation in Auctions for Financial Transmission Rights

Opgrand¹,

Preckel²,

Gotham³

et al. 2022

The Energy Journal

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“…In the absence of FTRs, nodal pricing would decrease generator revenues as generators would no longer receive IRSRs for free. This would be especially so for those generators located in areas with high export congestion and/or high losses (Frontier Economics, 2008;Gregan and Read, 2008;Read and Jackson, 2013;Biggar and Hesamzadeh, 2014):…”

Section: Figure 6: Effect On Wacc From Adopting Nodal Pricing Reformsmentioning

confidence: 99%

“…Volume-based basis risk under regional pricing -that is, the risk of being constrained-on or constrained-off -is converted into price-based basis risk under nodal pricing. This price risk can be perfectly hedged (at a cost to generators) with FTRs provided the FTRs are of sufficient firmness and duration (Gregan and Read, 2008;Read and Jackson, 2013;Biggar and Hesamzadeh, 2014;AEMC, 2019a). AEMC (2019a) proposes fixed-volume FTR options resulting in the following modification of a generator's revenue from equation (2):…”

Section: Figure 6: Effect On Wacc From Adopting Nodal Pricing Reformsmentioning

confidence: 99%

Financing costs and barriers to entry in Australia’s electricity market

Rai

Nelson

2021

JFEP

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Purpose This paper aims to provide investors’ views on financing costs and barriers to entry into the electricity generation sector, with a focus on investors’ views on potential impacts on cost of capital from adopting nodal pricing and financial transmission rights (FTRs). The implications for policymakers and policy reforms are also discussed in detail. Design/methodology/approach Survey-based data collection of investors and developers in electricity generation, consisting of multiple choice questions from a closed list of discrete choices, binary-choice questions, and questions with free-text/open-ended answers. Findings Across survey respondents, weighted-average cost of capital (WACCs) were broadly unchanged over 2019, with increases for undiversified/non-integrated participants offset by decreases for horizontally integrated participants. Cost of equity has risen, whereas cost of debt has fallen. Nodal pricing-cum-FTRs were estimated to increase WACCs by 150–200 basis points p.a. (15–20%), reflecting concerns around the firmness of FTRs and ability to automatically access intraregional settlement residues. Research limitations/implications These findings have energy policy implications, namely, the need to consider the interaction between economic theory and real-world financing models when designing and implementing fundamental energy sector reforms. Practical implications The need to consider implementation and transitional issues (e.g. grandfathering of existing rights, focusing on reducing the largest barriers to entry) is associated with implementing nodal pricing. Originality/value Unique set of survey questions and insights that have not previously been addressed in an Australian context; what-if analysis not previously done in an Australian context

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“…Yet, virtual bids that are unprofitable on a stand-alone basis may be used to move day-ahead prices in a direction that enhances the value of related financial positions. An example of related positions is given by financial transmission rights, which hedge the difference in dayahead locational marginal prices between two nodes and settle at the day-ahead price (Hogan, 1992;Rosellón and Kristiansen, 2013). The possibility that virtual bidding may be used strategically to enhance the value of FTRs has long been acknowledged (Isemonger, 2006;Celebi et al, 2010), and two electricity markets have monitoring rules to deter and detect this type of gaming ex post (PJM 5.…”

Section: Policy Contextmentioning

confidence: 99%

“…As discussed, FTRs may correspond to futures contracts in the analysis. In actual electricity markets, FTRs are constrained by the capacity of the transmission system, and the total amount of contracts that may be awarded must achieve simultaneous feasibility (Rosellón and Kristiansen, 2013). Accounting for transmission capacity constraints and other network characteristics, and regardless of physical generation and load, system operators determine the maximum amount of FTRs that would be dispatchable on the transmission path from source to sink; the set of FTRs awarded is simultaneously feasible only if it does not exceed network capacity.…”

Section: Bounded Normal Distributionsmentioning

confidence: 99%

Cross-product Manipulation in Electricity Markets, Microstructure Models and Asymmetric Information

Prete¹,

Hogan

Liu

et al. 2019

The Energy Journal

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Electricity market manipulation enforcement actions have moved from conventional analysis of generator market power in real-time physical markets to material allegations of sustained cross-product price manipulation in forward financial markets. A major challenge is to develop and apply forward market analytical frameworks and models. This task is more difficult than for the real-time market. An adaptation of cross-product manipulation models from cash-settled financial markets provides an existence demonstration under uncertainty and asymmetric information. The implications of this analysis include strong empirical predictions about necessary randomized strategies that are not likely to be observed or sustainable in electricity markets. Absent these randomized strategies and other market imperfections, the means for achieving sustained forward market price manipulation remains unexplained.

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Financial Transmission Rights

Cited by 32 publications

References 111 publications

Price Formation in Auctions for Financial Transmission Rights

Price Formation in Auctions for Financial Transmission Rights

Financing costs and barriers to entry in Australia’s electricity market

Cross-product Manipulation in Electricity Markets, Microstructure Models and Asymmetric Information

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