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.

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

“…3 Real-world FTR markets have encountered an array of challenges. Key among these is the empirical finding across multiple markets showing that FTR payouts regularly exceed auction proceeds, at significant expense for ratepayers (Baltaduonis et al, 2017; Leslie, 2021; Opgrand et al, 2022). Several explanations have been proposed for this finding, including the inherent risk in the assets and information asymmetries between market participants.…”

“… 3. Several works (e.g., Bartholomew et al, 2003; Deng et al, 2004; Siddiqui et al, 2005; Zhang, 2009; Hadsell and Shawky, 2009; Adamson et al, 2010; Deng et al, 2010; Baltaduonis et al, 2017; Olmstead, 2018; Leslie, 2021; Opgrand et al, 2022) investigate and discuss the efficiency of FTR markets, with no consensus on whether the markets are inherently inefficient. …”