IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v89y2020ics0140988320301584.html

Convergence bids and market manipulation in the California electricity market

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988320301584
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2020.104818?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Ruoyang Li & Alva Svoboda & Shmuel Oren, 2015. "Efficiency impact of convergence bidding in the california electricity market," Journal of Regulatory Economics, Springer, vol. 48(3), pages 245-284, December.
    2. Severin Borenstein & James Bushnell & Christopher R. Knittel & Catherine Wolfram, 2008. "Inefficiencies And Market Power In Financial Arbitrage: A Study Of California'S Electricity Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 56(2), pages 347-378, June.
    3. Kumar, Praveen & Seppi, Duane J, 1992. "Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-1502, September.
    4. Alberto Abadie & Susan Athey & Guido W Imbens & Jeffrey M Wooldridge, 2023. "When Should You Adjust Standard Errors for Clustering?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(1), pages 1-35.
    5. Akshaya Jha & Frank A. Wolak, 2019. "Can Financial Participants Improve Price Discovery and Efficiency in Multi-Settlement Markets with Trading Costs?," NBER Working Papers 25851, National Bureau of Economic Research, Inc.
    6. repec:aen:journl:1997v18-01-a03 is not listed on IDEAS
    7. Birge, John R. & Hortaçsu, Ali & Mercadal, Ignacia & Pavlin, J. Michael, 2018. "Limits to arbitrage in electricity markets: A case study of MISO," Energy Economics, Elsevier, vol. 75(C), pages 518-533.
    8. Koichiro Ito & Mar Reguant, 2016. "Sequential Markets, Market Power, and Arbitrage," American Economic Review, American Economic Association, vol. 106(7), pages 1921-1957, July.
    9. repec:aen:journl:1999v20-01-a01 is not listed on IDEAS
    10. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    11. Severin Borenstein & James Bushnell, 1999. "An Empirical Analysis of the Potential for Market Power in California’s Electricity Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 285-323, September.
    12. Bushnell, James, 1999. "Transmission Rights and Market Power," The Electricity Journal, Elsevier, vol. 12(8), pages 77-85, October.
    13. repec:aen:journl:ej40-5-loprete is not listed on IDEAS
    14. repec:aen:journl:2006v27-02-a09 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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).
    3. Simon Risanger & Jacob Mays, 2024. "Congestion Risk, Transmission Rights, and Investment Equilibria in Electricity Markets," The Energy Journal, , vol. 45(1), pages 173-200, January.
    4. Agostino Capponi & Garud Iyengar & Bo Yang & Daniel Bienstock, 2025. "Virtual Trading in Multi-Settlement Electricity Markets," Papers 2508.11979, arXiv.org.
    5. Xiao, Dongliang & Peng, Zena & Lin, Zhenjia & Zhong, Xiaoqing & Wei, Chun & Dong, Zhaoyang & Wu, Qiuwei, 2025. "Incorporating financial entities into spot electricity market with renewable energy via holistic risk-aware bilevel optimization," Applied Energy, Elsevier, vol. 398(C).
    6. Leon Stolle & Jonas Boeschemeier & Benjamin F. Hobbs & Karsten Neuhoff, 2026. "Designing Hedging Instruments for Locational Price Risks – Lessons from North American Financial Transmission Rights," Discussion Papers of DIW Berlin 2156, DIW Berlin, German Institute for Economic Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anna Schwele & Christos Ordoudis & Pierre Pinson & Jalal Kazempour, 2021. "Coordination of power and natural gas markets via financial instruments," Computational Management Science, Springer, vol. 18(4), pages 505-538, October.
    2. Melita Van Steenberghe & Marten Ovaere, 2025. "Market Inefficiencies in Renewable Support Policies: Evidence from Offshore Wind Contracts for Difference in Great Britain," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 25/1124, Ghent University, Faculty of Economics and Business Administration.
    3. Ehsan Samani & Mahdi Kohansal & Hamed Mohsenian-Rad, 2021. "A Data-Driven Convergence Bidding Strategy Based on Reverse Engineering of Market Participants' Performance: A Case of California ISO," Papers 2109.09238, arXiv.org.
    4. Van Moer, Geert, 2019. "Electricity market competition when forward contracts are pairwise efficient," MPRA Paper 96660, University Library of Munich, Germany.
    5. Leslie, Gordon W., 2021. "Who benefits from ratepayer-funded auctions of transmission congestion contracts? Evidence from New York," Energy Economics, Elsevier, vol. 93(C).
    6. Guo, Nongchao & Lo Prete, Chiara, 2019. "Cross-product manipulation with intertemporal constraints: An equilibrium model," Energy Policy, Elsevier, vol. 134(C).
    7. Medrano, Luis Angel & Vives, Xavier, 2001. "Strategic Behavior and Price Discovery," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 221-248, Summer.
    8. David P. Brown & Andrew Eckert & Douglas Silveira, 2023. "Strategic interaction between wholesale and ancillary service markets," Competition and Regulation in Network Industries, , vol. 24(4), pages 174-198, December.
    9. Khanna, Naveen & Sonti, Ramana, 2004. "Value creating stock manipulation: feedback effect of stock prices on firm value," Journal of Financial Markets, Elsevier, vol. 7(3), pages 237-270, June.
    10. Brekke, Kurt R. & Straume, Odd Rune & Sørgard, Lars, 2025. "Trade, renewable energy, and market power in power markets," Energy Economics, Elsevier, vol. 151(C).
    11. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2002. "The Role of Large Players in Currency Crises," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 197-268, National Bureau of Economic Research, Inc.
    12. Peck, James, 2014. "A battle of informed traders and the market game foundations for rational expectations equilibrium," Games and Economic Behavior, Elsevier, vol. 88(C), pages 153-173.
    13. Matthew Pritsker, 2005. "Large investors: implications for equilibrium asset, returns, shock absorption, and liquidity," Finance and Economics Discussion Series 2005-36, Board of Governors of the Federal Reserve System (U.S.).
    14. Markus K. Brunnermeier & Martin Oehmke, 2014. "Predatory Short Selling," Review of Finance, European Finance Association, vol. 18(6), pages 2153-2195.
    15. Dressler, Luisa, 2016. "Support schemes for renewable electricity in the European Union: Producer strategies and competition," Energy Economics, Elsevier, vol. 60(C), pages 186-196.
    16. Chakraborty, Archishman & Yilmaz, Bilge, 2004. "Manipulation in market order models," Journal of Financial Markets, Elsevier, vol. 7(2), pages 187-206, February.
    17. Koichiro Ito & Mar Reguant, 2016. "Sequential Markets, Market Power, and Arbitrage," American Economic Review, American Economic Association, vol. 106(7), pages 1921-1957, July.
    18. Hsu, Chih-Hsiang, 2016. "Strategic noise trading of later-informed traders in a multi-market framework," Economic Modelling, Elsevier, vol. 54(C), pages 235-243.
    19. Zheng, Yi & Wang, Jian & Wang, Chengmin & Huang, Chunyi & Yang, Jingfei & Xie, Ning, 2025. "Strategic bidding of wind farms in medium-to-long-term rolling transactions: A bi-level multi-agent deep reinforcement learning approach," Applied Energy, Elsevier, vol. 383(C).
    20. Jerry Anunrojwong & Santiago R. Balseiro & Omar Besbes & Bolun Xu, 2024. "Battery Operations in Electricity Markets: Strategic Behavior and Distortions," Papers 2406.18685, arXiv.org, revised Mar 2025.

    More about this item

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:89:y:2020:i:c:s0140988320301584. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.