The inherent inefficiency of simultaneously feasible financial transmission rights auctions
Empirical evidence from the New York ISO shows that the clearing prices for point-to-point congestion revenue rights, also known as financial transmission rights (FTRs), resulting from centralized auctions conducted by Independent System Operators differ significantly and systematically from the realized congestion revenues that determine the accrued payoffs of these rights. The question addressed by this paper is whether such deviations are due to price discovery errors which will eventually vanish or due to inherent inefficiencies in the auction structure. We show that even with perfect foresight of average congestion rents the clearing prices for the FTRs depend on the bid quantity and therefore may not be priced correctly in the financial transmission right (FTR) auction. In particular, we prove that quantity limits on the FTR bids may cause the auction clearing prices to differ from the bid prices. This phenomenon which is inherent in the theoretical properties of the optimization algorithm used to clear the auction, is further illustrated through numerical simulations with test systems. We conclude that price discovery alone would not remedy the discrepancy between the auction prices and the realized values of the FTRs. Secondary markets or frequent reconfiguration auctions are necessary in order to achieve such convergence.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hung-po Chao & Stephen Peck, 1997. "An Institutional Design for an Electricity Contract Market with Central Dispatch," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 85-110.
- Chao, Hung-Po & Peck, Stephen C, 1998. "Reliability Management in Competitive Electricity Markets," Journal of Regulatory Economics, Springer, vol. 14(2), pages 189-200, September.
- Bushnell, James B. & Stoft, Steven E., 1997.
"Improving private incentives for electric grid investment,"
Resource and Energy Economics,
Elsevier, vol. 19(1-2), pages 85-108, March.
- Bushnell, James & Stoft, Steven, 1997. "Improving Private Incentives for Electric Grid Investment," Staff General Research Papers Archive 31549, Iowa State University, Department of Economics.
- Adamson, Seabron & Noe, Thomas & Parker, Geoffrey, 2010. "Efficiency of financial transmission rights markets in centrally coordinated periodic auctions," Energy Economics, Elsevier, vol. 32(4), pages 771-778, July.
- Chao, Hung-Po & Peck, Stephen, 1996. "A Market Mechanism for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 10(1), pages 25-59, July.
- Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
- Chao, Hung-po & Peck, Stephen & Oren, Shmuel & Wilson, Robert, 2000. "Flow-Based Transmission Rights and Congestion Management," The Electricity Journal, Elsevier, vol. 13(8), pages 38-58, October.
- Bartholomew, Emily S. & Siddiqui, Afzal S. & Marnay, Chris & Oren, Shmuel S., 2003. "The New York Transmission Congestion Contract Market: Is It Truly Working Efficiently?," The Electricity Journal, Elsevier, vol. 16(9), pages 14-24, November. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:32:y:2010:i:4:p:779-785. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.