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Optimal congestion treatment for bilateral electricity trading

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Abstract

How to treat transmission constraints in electricity markets that are not based on a pool but on bilateral trading? Three approaches are currently discussed: First, the system operator resolves constraints and socialises costs; second, physical transmission contracts; third, locational charging with the option of financial hedging. Socialisation of costs for constraint resolution results in inefficient dispatch and incorrect incentives for investment in generation. Physical contracts and locational charging designs have identical properties in a very simplified model world, but differ if transaction costs, illiquid markets and uncertainty about demand are considered. Physical transmission contracts are best designed as zonal access rights, but have to be centrally administered to be efficient. Only locational charging can cope with uncertainty and volatility of electricity demand efficiently and non-discriminatory. Qualitative arguments allow ranking of designs involving physical contracts and locational charging. Comparison with a system operator socialising costs requires network specific analysis.

Suggested Citation

  • Neuhoff, K., 2002. "Optimal congestion treatment for bilateral electricity trading," Cambridge Working Papers in Economics 0214, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0214
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    File URL: http://www.econ.cam.ac.uk/electricity/publications/wp/ep05.pdf
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    1. Brunekreeft, Gert & Neuhoff, Karsten & Newbery, David, 2005. "Electricity transmission: An overview of the current debate," Utilities Policy, Elsevier, vol. 13(2), pages 73-93, June.
    2. Neuhoff, K., 2003. "Integrating Transmission and Energy Markets Mitigates Market Power," Cambridge Working Papers in Economics 0310, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    Electricity Networks; Constraint Management; Market Design; Bilateral Trading;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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