Risk and Abnormal Returns in Markets for Congestion Revenue Rights

In organized energy markets that use locational pricing, power generators and energy suppliers procure financial transmission rights (FTRs) to hedge against grid con- gestion charges, while third-party speculators attempt to capture a return with these extremely volatile contracts. This paper develops a novel methodology for estimating the systematic risk of individual FTRs and detecting the presence of abnormal returns among these financial instruments. The prevalence of congestion paths with abnormal returns could be used by policy experts as an efficiency measure when assessing the performance of FTR markets. Being the only organized energy market in the Western Interconnection, California has implemented a version of FTRs officially known as congestion revenue rights (CRRs). This paper applies the proposed methodology to all auctioned CRRs from 2009 to 2015. Our analysis identifies the paths that exhibit persistent abnormal returns, with the majority of them being positive. We also compare the patterns of risk and abnormal returns between on-peak and off-peak CRRs, and find no significant differences

Testing financial and real market operations in restructured electricity systems: four theoretical and empirical studies

To facilitate the U.S. wholesale electric power restructuring process and promote competitive market outcomes, in April 2003 the U.S. Federal Energy Regulatory Commission (FERC) proposed a complicated market design called the Wholesale Power Market Platform (WPMP) for common adoption by all U.S. wholesale power markets. Despite the fact that versions of the WPMP have been widely implemented in many states, strong opposition to the WPMP persists among some industry stakeholders due largely to a perceived lack of adequate performance testing. In this dissertation, I apply analytical, statistical and agent-based computational simulation tools to analyze and test financial and real power market operations under the current WPMP design. The overall dissertation objective is to better understand how and to what extent the WPMP design facilitates to produce orderly, fair and efficient market outcomes. Four related studies have been undertaken to address four different issues at four different levels. Specifically, my first paper is a theoretical study of financial transmission right (FTR) markets. My second paper is an empirical study on the Midwest FTR market using statistical estimation tools. My third paper is an agent-based computational wholesale power market simulation study for systematic market design tests and market structure analyses. And my fourth paper is an optimization study in which I develop a Java-based DC OPF solver

Efficiency of New York Transmission Congestion Contract Auctions

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Alternative Models to Analyze Market Power and Financial Transmission Rights in Electricity Markets

One of the main concerns with the introduction of competition in the power sector is the strategic behaviour of market participants. Computable models of strategic behaviour are becoming increasingly important to understand the complexities of competition. Such models can help analyze market designs and regulatory policies. In this thesis, further developments on the modelling and analysis of strategic behaviour in electricity markets are presented. This thesis work has been conducted along three research lines. In the first research line, an oligopolistic model of a joint energy and spinning reserve market is formulated to analyze imperfect competition. Strategic behaviour is introduced by means of conjectured functions. With this integrated formulation for imperfect competition, the opportunity cost between generation and spinning reserve has been analytically derived. Besides, inter-temporal and energy constraints, and financial transmission rights are taken into account. Under such considerations, competition in electricity markets is modelled with more realism. The oligopolistic model is formulated as an equilibrium problem in terms of complementarity conditions. In the second research line, a methodology to screen and mitigate the potential exacerbation of market power due to the ownership of financial transmission rights is presented. Hedging position ratios are computed to quantify the hedging level of financial transmission rights. They are based on the actual impact that each participant has in the energy market, and on the potential impact that it would have with the ownership of financial transmission rights. Thus, hedging position ratios are used to identify the potential gambling positions from the transmission rights bidders, and, therefore, used to prioritize critical positions in the auction for transmission rights. In the last research line, alternative equilibrium models of markets for financial transmission rights are formulated. The proposed equilibrium framework is more natural and flexible for modelling markets than the classic cost-minimization markets. Different markets for financial transmission rights are modelled, namely: i) forwards, ii) options, and iii) joint forwards and options. Moreover, one-period, multi-period and multi-round markets for forwards are derived. These equilibrium models are proposed to analyze the bidding strategies of market participants. The potential impact of bidders on congestion prices is modelled by means of conjectured transmission price functions

Efficiency of New York transmission congestion contract auctions

Modern electricity market design is dominated by locational marginal pricing (LMP) of energy and transmission, coupled with periodic auctions of financial transmission rights (FTRs or TCCs) to hedge congestion price risks. For these market designs to be effective, participants must be able to efficiently discover forward locational prices. With data from monthly TCC auctions in New York, we use time series ARCH-ARMA models to postulate how clearing prices for TCCs are formed and the resulting implications for market efficiency. This analysis confirms recent studies suggesting that these auctions remain highly inefficient, even after allowing for risk aversion among bidders in the auctions