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Generalized FTRs for hedging inter-nodal pricing risk

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  • Hesamzadeh, Mohammad Reza
  • Biggar, Darryl R.

Abstract

tIn liberalised wholesale power markets, risk averse market participants seek to enter into hedge contracts referenced to their local pricing node to offset the price and volume risks they face. In typical power markets, a range of inter-temporal hedge products emerge to meet these needs, such as swaps, caps, or load-following hedges. But some market participants also face risks from trading across pricing locations. To facilitate the hedging of these risks, many liberalised wholesale power markets make available an inter-nodal hedging instrument known as fixed-volume Financial Transmission Rights (FTRs). But, with the increasing penetration of intermittent and peaking generation, very few market participants trade in a fixed volume of electricity; most market participants cannot effectively hedge their inter-nodal pricing risks using fixed-volume instruments. To solve this problem, we propose a generalization of the concept of FTRs. Specifically, we propose that for each conventional hedge contract traded in the market, such as a Cap or Floor, a matching generalized Financial Transmission Right is made available to the market. We show that traders can form a portfolio of these generalized FTRs (G-FTRs) which matches the supply curve of a generator or the demand curve of a load. We show that, given access to a full range of G-FTRs, traders can offer generators, loads, and the system operator the hedge contracts they need to fully insulate themselves from all risk while taking the market risk on themselves. This approach offers the potential for a substantial improvement in the effectiveness of hedging of inter-nodal pricing risk in liberalised wholesale electricity markets.

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  • Hesamzadeh, Mohammad Reza & Biggar, Darryl R., 2021. "Generalized FTRs for hedging inter-nodal pricing risk," Energy Economics, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:eneeco:v:94:y:2021:i:c:s0140988320303881
    DOI: 10.1016/j.eneco.2020.105048
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    1. Eicke, Anselm & Schittekatte, Tim, 2022. "Fighting the wrong battle? A critical assessment of arguments against nodal electricity prices in the European debate," Energy Policy, Elsevier, vol. 170(C).

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