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The inherent inefficiency of simultaneously feasible financial transmission rights auctions

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  • 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
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    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. 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.
    3. Sun, Junjie, 2005. "U.S. Financial Transmission Rights: Theory and Practice," Staff General Research Papers Archive 12266, Iowa State University, Department of Economics.
    4. Hesamzadeh, Mohammad Reza & Biggar, Darryl R., 2021. "Generalized FTRs for hedging inter-nodal pricing risk," Energy Economics, Elsevier, vol. 94(C).
    5. 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).
    6. Michael G. Pollitt, 2011. "Lessons from the History of Independent System Operators in the Energy Sector, with applications to the Water Sector," Working Papers EPRG 1125, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    7. 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.
    8. 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).
    9. 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.
    10. Benjamin, Richard, 2010. "A further inquiry into FTR properties," Energy Policy, Elsevier, vol. 38(7), pages 3547-3556, July.

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