[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v32y2010i4p779-785.html
   My bibliography  Save this article

The inherent inefficiency of simultaneously feasible financial transmission rights auctions

Author

Listed:
  • Deng, Shi-Jie
  • Oren, Shmuel
  • Meliopoulos, A.P.
Abstract
Empirical evidence from the New York ISO shows that the clearing prices for point-to-point congestion revenue rights, also known as financial transmission rights (FTRs), resulting from centralized auctions conducted by Independent System Operators differ significantly and systematically from the realized congestion revenues that determine the accrued payoffs of these rights. The question addressed by this paper is whether such deviations are due to price discovery errors which will eventually vanish or due to inherent inefficiencies in the auction structure. We show that even with perfect foresight of average congestion rents the clearing prices for the FTRs depend on the bid quantity and therefore may not be priced correctly in the financial transmission right (FTR) auction. In particular, we prove that quantity limits on the FTR bids may cause the auction clearing prices to differ from the bid prices. This phenomenon which is inherent in the theoretical properties of the optimization algorithm used to clear the auction, is further illustrated through numerical simulations with test systems. We conclude that price discovery alone would not remedy the discrepancy between the auction prices and the realized values of the FTRs. Secondary markets or frequent reconfiguration auctions are necessary in order to achieve such convergence.

Suggested Citation

  • Deng, Shi-Jie & Oren, Shmuel & Meliopoulos, A.P., 2010. "The inherent inefficiency of simultaneously feasible financial transmission rights auctions," Energy Economics, Elsevier, vol. 32(4), pages 779-785, July.
    • Handle: RePEc:eee:eneeco:v:32:y:2010:i:4:p:779-785
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140-9883(10)00021-6
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hung-po Chao & Stephen Peck, 1997. "An Institutional Design for an Electricity Contract Market with Central Dispatch," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 85-110.
    2. Adamson, Seabron & Noe, Thomas & Parker, Geoffrey, 2010. "Efficiency of financial transmission rights markets in centrally coordinated periodic auctions," Energy Economics, Elsevier, vol. 32(4), pages 771-778, July.
    3. Chao, Hung-po & Peck, Stephen & Oren, Shmuel & Wilson, Robert, 2000. "Flow-Based Transmission Rights and Congestion Management," The Electricity Journal, Elsevier, vol. 13(8), pages 38-58, October.
    4. Bushnell, James B. & Stoft, Steven E., 1997. "Improving private incentives for electric grid investment," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 85-108, March.
    5. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
    6. Bartholomew, Emily S. & Siddiqui, Afzal S. & Marnay, Chris & Oren, Shmuel S., 2003. "The New York Transmission Congestion Contract Market: Is It Truly Working Efficiently?," The Electricity Journal, Elsevier, vol. 16(9), pages 14-24, November.
    7. Chao, Hung-Po & Peck, Stephen C, 1998. "Reliability Management in Competitive Electricity Markets," Journal of Regulatory Economics, Springer, vol. 14(2), pages 189-200, September.
    8. Chao, Hung-Po & Peck, Stephen, 1996. "A Market Mechanism for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 10(1), pages 25-59, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Birge, John R. & Hortaçsu, Ali & Mercadal, Ignacia & Pavlin, J. Michael, 2018. "Limits to arbitrage in electricity markets: A case study of MISO," Energy Economics, Elsevier, vol. 75(C), pages 518-533.
    2. Pollitt, M. J., 2011. "Lessons from the History of Independent System Operators in the Energy Sector, with applications to the Water Sector," Cambridge Working Papers in Economics 1153, Faculty of Economics, University of Cambridge.
    3. Wobben, Magnus & Dieckmann, Birgit & Reichmann, Oleg, 2012. "Valuation of physical transmission rights—An analysis of electricity cross-border capacities between Germany and the Netherlands," Energy Policy, Elsevier, vol. 42(C), pages 174-180.
    4. Sun, Junjie, 2005. "U.S. Financial Transmission Rights: Theory and Practice," Staff General Research Papers Archive 12266, Iowa State University, Department of Economics.
    5. Bertsch, Joachim, 2015. "Is an inefficient transmission market better than none at all? On zonal and nodal pricing in electricity systems," EWI Working Papers 2015-5, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    6. Hesamzadeh, Mohammad Reza & Biggar, Darryl R., 2021. "Generalized FTRs for hedging inter-nodal pricing risk," Energy Economics, Elsevier, vol. 94(C).
    7. Martin Bichler & Hans Ulrich Buhl & Johannes Knörr & Felipe Maldonado & Paul Schott & Stefan Waldherr & Martin Weibelzahl, 2022. "Electricity Markets in a Time of Change: A Call to Arms for Business Research," Schmalenbach Journal of Business Research, Springer, vol. 74(1), pages 77-102, March.
    8. Gauthier, Geneviève & Godin, Frédéric & Trudeau, Gabrielle, 2023. "Pricing inconsistency between the futures and Financial Transmission Right markets in North America," Energy Economics, Elsevier, vol. 126(C).
    9. Pollitt, Michael G., 2012. "Lessons from the history of independent system operators in the energy sector," Energy Policy, Elsevier, vol. 47(C), pages 32-48.
    10. Benjamin, Richard, 2010. "A further inquiry into FTR properties," Energy Policy, Elsevier, vol. 38(7), pages 3547-3556, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daniel Muñoz-Álvarez & Eilyan Bitar, 2017. "Financial storage rights in electric power networks," Journal of Regulatory Economics, Springer, vol. 52(1), pages 1-23, August.
    2. Richard O’Neill & Emily Fisher & Benjamin Hobbs & Ross Baldick, 2008. "Towards a complete real-time electricity market design," Journal of Regulatory Economics, Springer, vol. 34(3), pages 220-250, December.
    3. Jacqueline Boucher & Yves Smeers, 2001. "Alternative Models of Restructured Electricity Systems, Part 1: No Market Power," Operations Research, INFORMS, vol. 49(6), pages 821-838, December.
    4. Perez-Arriaga, Ignacio J. & Olmos, Luis, 2005. "A plausible congestion management scheme for the internal electricity market of the European Union," Utilities Policy, Elsevier, vol. 13(2), pages 117-134, June.
    5. BOUCHER, Jacqueline & SMEERS, Yves, 1999. "Alternative models of restructured electricity systems. Part 1: no market power," LIDAM Discussion Papers CORE 1999050, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Rajnish Kamat & Shmuel Oren, 2004. "Two-settlement Systems for Electricity Markets under Network Uncertainty and Market Power," Journal of Regulatory Economics, Springer, vol. 25(1), pages 5-37, January.
    7. DAXHELET, Olivier & SMEERS, Yves, 1999. "Variational inequality models of restructured electricity systems," LIDAM Discussion Papers CORE 1999066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Garcia, Reinaldo C. & Contreras, Javier & Correia, Pedro F. & Muñoz, José I., 2010. "Transmission assets investment timing using net present value curves," Energy Policy, Elsevier, vol. 38(1), pages 598-605, January.
    9. Benjamin, Richard, 2010. "A further inquiry into FTR properties," Energy Policy, Elsevier, vol. 38(7), pages 3547-3556, July.
    10. Hagspiel, Simeon & Jägemann, Cosima & Lindenberger, Dietmar & Brown, Tom & Cherevatskiy, Stanislav & Tröster, Eckehard, 2013. "Cost-Optimal Power System Extension under Flow-Based Market Coupling," EWI Working Papers 2013-9, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    11. Biggar, Darryl R. & Hesamzadeh, Mohammad Reza, 2022. "An integrated theory of dispatch and hedging in wholesale electric power markets," Energy Economics, Elsevier, vol. 112(C).
    12. Martin Weibelzahl & Alexandra Märtz, 2020. "Optimal storage and transmission investments in a bilevel electricity market model," Annals of Operations Research, Springer, vol. 287(2), pages 911-940, April.
    13. Brunekreeft, Gert, 2004. "Market-based investment in electricity transmission networks: controllable flow," Utilities Policy, Elsevier, vol. 12(4), pages 269-281, December.
    14. Stephen C. Littlechild & Carlos J. Skerk, 2004. "Regulation of transmission expansion in Argentina Part I: State ownership, reform and the Fourth Line," Working Papers EP61, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    15. Makoto TANAKA, 2005. "Optimal Transmission Capacity under Nodal Pricing and Incentive Regulation for Transco," Discussion papers 05021, Research Institute of Economy, Trade and Industry (RIETI).
    16. Deng, S.J. & Oren, S.S., 2006. "Electricity derivatives and risk management," Energy, Elsevier, vol. 31(6), pages 940-953.
    17. Brunekreeft, G., 2003. "Market-based Investment in Electricity Transmission Networks: Controllable Flow," Cambridge Working Papers in Economics 0340, Faculty of Economics, University of Cambridge.
    18. Matsukawa, Isamu, 2008. "The effects of average revenue regulation on electricity transmission investment and pricing," Energy Economics, Elsevier, vol. 30(3), pages 696-714, May.
    19. Littlechild, Stephen C. & Skerk, Carlos J., 2008. "Transmission expansion in Argentina 2: The Fourth Line revisited," Energy Economics, Elsevier, vol. 30(4), pages 1385-1419, July.
    20. Vincent Rious & Yannick Perez & Philippe Dessante, 2008. "Is combination of nodal pricing and average participation tariff the best solution to coordinate the location of power plants with lumpy transmission investments?," Post-Print hal-00323878, HAL.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:32:y:2010:i:4:p:779-785. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.