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Convergence bids and market manipulation in the California electricity market

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  • Hopkins, Caroline A.

Abstract

Financial instruments are designed to improve the efficiency of a physical market in theory. In practice, underlying physical relationships may prevent financial instruments from working as intended. This paper analyzes the relationship between two financial instruments in electricity markets: convergence bidding and congestion revenue rights. Convergence bids allow participants to trade virtual power, whereas congestion revenue rights capture the value of congestion on a transmission line. Both instruments were introduced to solve inefficiencies, however the interaction of these two instruments provides incentives for manipulation. In this work I test whether the financial instruments are being used as intended. The results show that electricity market participants are more likely to hold unprofitable convergence bids on a node where the convergence bid can benefit the value of the congestion revenue rights held at that node. This type of uneconomic convergence bid is consistent with manipulative behavior. I then perform a back of the envelope calculation that shows these potentially manipulative convergence bids create inefficiencies in the market.

Suggested Citation

  • Hopkins, Caroline A., 2020. "Convergence bids and market manipulation in the California electricity market," Energy Economics, Elsevier, vol. 89(C).
    • Handle: RePEc:eee:eneeco:v:89:y:2020:i:c:s0140988320301584
    DOI: 10.1016/j.eneco.2020.104818
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    References listed on IDEAS

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    Cited by:

    1. Leslie, Gordon W., 2021. "Who benefits from ratepayer-funded auctions of transmission congestion contracts? Evidence from New York," Energy Economics, Elsevier, vol. 93(C).
    2. Ren, Kezheng & Liu, Jun & Liu, Xinglei & Nie, Yongxin, 2023. "Reinforcement Learning-Based Bi-Level strategic bidding model of Gas-fired unit in integrated electricity and natural gas markets preventing market manipulation," Applied Energy, Elsevier, vol. 336(C).

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    More about this item

    Keywords

    Electricity market; Financial instruments; Congestion revenue rights; Convergence bids; Market manipulation;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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