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Economic Inefficiency of Passive Transmission Rights in Congested Electricity Systems with Competitive Generation

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Author Info
Shmuel S. Oren
Abstract

The main thesis of this paper is that passive transmission rights such as Transmission Congestion Contracts (TCCs) that are compensated ex-post based on nodal prices resulting from optimal dispatch by an Independent System Operator (ISO) will be preempted by the strategic bidding of the generators. Thus, even when generation is competitive, rational expectations of congestion will induce implicit collusion enabling generators to raise their bids above marginal costs and capture the congestion rents, leaving the TCCs uncompensated. These conclusions are based on a Cournot model of competition across congested transmission links where an ISO dispatches generators optimally based on bid prices. We characterize the Cournot equilibrium in congested electricity networks with two and three nodes. We show that absent active transmission rights trading, the resulting equilibrium may be at an inefficient dispatch and congestion rents will be captured by the generators. We also demonstrate how active trading of transmission rights in parallel with 42 competitive energy market can prevent the price distortion and inefficient dispatch associated with passive transmission rights.

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Publisher Info
Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): 18 (1997)
Issue (Month): 1 ()
Pages: 63-84
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Handle: RePEc:aen:journl:1997v18-01-a03

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F0 - International Economics - - General

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  1. Sun, Junjie, 2005. "U.S. Financial Transmission Rights: Theory and Practice," Staff General Research Papers 12266, Iowa State University, Department of Economics. [Downloadable!]
  2. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 261-290, November. [Downloadable!] (restricted)
  3. Hu, X. & Ralph, R., 2006. "Using EPECs to model bilevel games in restructured electricity markets with locational prices," Cambridge Working Papers in Economics 0619, Faculty of Economics, University of Cambridge. [Downloadable!]
  4. Guido Pepermans & Bert Willems, 2004. "Ramsey Pricing in a Congested Network with Market Power in Generation: A Numerical Illustration for Belgium," Energy, Transport and Environment Working Papers Series ete0408, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment. [Downloadable!]
  5. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 358-387, November. [Downloadable!] (restricted)
  6. Machiel Mulder & Gijsbert Zwart, 2006. "Market failures and government policies in gas markets," CPB Memoranda 143, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  7. Guido Pepermans & Bert Willems, 2005. "The potential impact of cross-ownership in transmission: An application to the Belgian electricity market," Energy, Transport and Environment Working Papers Series ete0501, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment. [Downloadable!]
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  8. Hu, X. & Ralph, D. & Ralph, E.K. & Bardsley, P. & Ferris, M.C., 2004. "Electricity Generation with Looped Transmission Networks: Bidding to an ISO," Cambridge Working Papers in Economics 0470, Faculty of Economics, University of Cambridge. [Downloadable!]
  9. Brennan, Timothy, 2005. "Alleged Transmission Undersupply: Is Restructuring the Cure or the Cause?," Discussion Papers dp-05-50, Resources For the Future. [Downloadable!]
  10. 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. [Downloadable!] (restricted)
  11. Paul Twomey & Richard Green & Karsten Neuhoff & David Newbery, 2005. "A Review of the Monitoring of Market Power: The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems," Working Papers 0502, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
    Other versions:
  12. 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. [Downloadable!] (restricted)
  13. Wilson, Robert B., 2007. "Supply Function Equilibrium in a Constrained Transmission System," Research Papers 1966, Stanford University, Graduate School of Business. [Downloadable!]
    Other versions:
  14. DAXHELET, Olivier & SMEERS, Yves, 1999. "Variational inequality models of restructured electricity systems," CORE Discussion Papers 1999066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  15. Mario Ibarburu, 2001. "Regulación en los mercados eléctricos competitivos," Documentos de Trabajo (working papers) 0801, Department of Economics - dECON. [Downloadable!]
  16. Neuhoff, K., 2003. "Integrating Transmission and Energy Markets Mitigates Market Power," Cambridge Working Papers in Economics 0310, Faculty of Economics, University of Cambridge. [Downloadable!]
  17. Severin Borenstein & James Bushnell & Frank Wolak, 2000. "Diagnosing Market Power in California's Restructured Wholesale Electricity Market," NBER Working Papers 7868, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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