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Congestion management rules and trading strategies

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  • Mª Dolores Furió Ortega
  • Julio Lucia López
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    Abstract

    This paper empirically investigates how the economic incentives embodied in the rules governing the resolution of transmission constraints in the Spanish wholesale electricity market have influenced the trading strategies spanning all the sections of the market followed by buyers and sellers. The results show several facts with far reaching consequences. First, participants in the spot market follow dynamic trading strategies that span all the sections of the market, i.e. their strategies take into account the effects of participation in one section of the market over another. Second, the results show the importance of the structure of economic incentives implied by the regulations in explaining the trading behaviour of market participants. In particular, producers seem to be able to recognize and exploit the consequences of their role in the resolution of transmission constraints, and buyers respond to the way congestion costs are billed to them. Third, participation in the resolution of transmission constraints does not affect the revenues of all production facilities in the same way, due to the different roles they play in the procedure, coupled with the asymmetric reward scheme. Finally, the results shed light on what should be expected of the recent reforms in the aforementioned rules.

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    File URL: http://documentos.fedea.net/pubs/eee/eee222.pdf
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    Bibliographic Info

    Paper provided by FEDEA in its series Studies on the Spanish Economy with number 222.

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    Handle: RePEc:fda:fdaeee:222

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    1. Fabra, Natalia & Toro, Juan, 2005. "Price wars and collusion in the Spanish electricity market," International Journal of Industrial Organization, Elsevier, vol. 23(3-4), pages 155-181, April.
    2. Kai-Uwe Kühn & Matilde Machado, 2004. "Bilateral Market Power And Vertical Integration In The Spanish Electricity Spot Market," Working Papers wp2004_0414, CEMFI.
    3. Arocena, Pablo & Kuhn, Kai-Uwe- & Regibeau, Pierre, 1999. "Regulatory reform in the Spanish electricity industry: a missed opportunity for competition," Energy Policy, Elsevier, vol. 27(7), pages 387-399, July.
    4. Pardo, Angel & Meneu, Vicente & Valor, Enric, 2002. "Temperature and seasonality influences on Spanish electricity load," Energy Economics, Elsevier, vol. 24(1), pages 55-70, January.
    5. Richard Green, 2001. "Markets for Electricity in Europe," Oxford Review of Economic Policy, Oxford University Press, vol. 17(3), pages 329-345.
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