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Valuation anomalies for interconnector transmission rights

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  • McInerney, Celine
  • Bunn, Derek

Abstract

Whilst the acquisition of physical transmission interconnector rights between two or more electricity markets can be structured as spread options on the spot prices of electricity between connected markets, empirical evidence suggests that actual prices may be quite different. This raises issues for the valuation of transmission rights, particularly in the European context of market harmonisation, and the use of transmission rights with increasing levels of wind penetration. We examine the price differentials between the Irish and British electricity markets, where explicit transmission capacity auctions have been persistently undersubscribed and transmission rights acquired but not fully utilised. We find significant empirical indications that auction prices for transmission rights are undervalued against both arbitrage and spread option valuations. We also find significant power flows against the efficient price spread direction. A survey of a group of experts with an interest in trading power between Ireland and Britain inform a number of possible explanations for the apparent inefficiencies. These include ex-post pricing in the Irish market, intermittent wind and strategic behaviour by dominant firms.

Suggested Citation

  • McInerney, Celine & Bunn, Derek, 2013. "Valuation anomalies for interconnector transmission rights," Energy Policy, Elsevier, vol. 55(C), pages 565-578.
  • Handle: RePEc:eee:enepol:v:55:y:2013:i:c:p:565-578 DOI: 10.1016/j.enpol.2012.12.050
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    References listed on IDEAS

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    Cited by:

    1. Meyer, Roland & Gore, Olga, 2015. "Cross-border effects of capacity mechanisms: Do uncoordinated market design changes contradict the goals of the European market integration?," Energy Economics, Elsevier, vol. 51(C), pages 9-20.
    2. Gaffney, F. & Deane, J.P. & Gallachóir, B.P.Ó, 2017. "A 100 year review of electricity policy in Ireland (1916–2015)," Energy Policy, Elsevier, vol. 105(C), pages 67-79.
    3. Ries, Jan & Gaudard, Ludovic & Romerio, Franco, 2016. "Interconnecting an isolated electricity system to the European market: The case of Malta," Utilities Policy, Elsevier, vol. 40(C), pages 1-14.
    4. Hyland, Marie, 2016. "Restructuring European electricity markets – A panel data analysis," Utilities Policy, Elsevier, vol. 38(C), pages 33-42.
    5. Di Cosmo, Valeria & Lynch, Muireann Á., 2016. "Competition and the single electricity market: Which lessons for Ireland?," Utilities Policy, Elsevier, vol. 41(C), pages 40-47.
    6. Lynch & John Curtis, 2016. "The effects of wind generation capacity on electricity prices and generation costs: a Monte Carlo analysis," Applied Economics, Taylor & Francis Journals, vol. 48(2), pages 133-151, January.
    7. John Curtis, Valeria Di Cosmo, and Paul Deane, 2014. "Climate policy, interconnection and carbon leakage: The effect of unilateral UK policy on electricity and GHG emissions in Ireland," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    8. Curtis, John & Devitt, Niamh & di Cosmo, Valeria & Farrell, Niall & FitzGerald, John & Hyland, Marie & Lynch, Muireann & Lyons, Sean & McCoy, Daire & Malaguzzi Valeri, Laura & Walsh, Darragh, 2014. "Irish Energy Policy: An Analysis of Current Issues," Research Series, Economic and Social Research Institute (ESRI), number rs37 edited by FitzGerald, John & Malaguzzi Valeri, Laura.
    9. Sébastien Phan & Fabien Roques, 2015. "Is the depressive effect of renewables on power prices contagious? A cross border econometric analysis," Cambridge Working Papers in Economics 1527, Faculty of Economics, University of Cambridge.
    10. de Menezes, Lilian M. & Houllier, Melanie A., 2015. "Germany's nuclear power plant closures and the integration of electricity markets in Europe," Energy Policy, Elsevier, vol. 85(C), pages 357-368.
    11. Dutton, Joseph & Lockwood, Matthew, 2017. "Ideas, institutions and interests in the politics of cross-border electricity interconnection: Greenlink, Britain and Ireland," Energy Policy, Elsevier, vol. 105(C), pages 375-385.
    12. Higgins, P. & Li, K. & Devlin, J. & Foley, A.M., 2015. "The significance of interconnector counter-trading in a security constrained electricity market," Energy Policy, Elsevier, vol. 87(C), pages 110-124.
    13. Curtis, John & Lynch, Muireann Á. & Zubiate, Laura, 2016. "Carbon dioxide (CO2) emissions from electricity: The influence of the North Atlantic Oscillation," Applied Energy, Elsevier, pages 487-496.
    14. Gore, Olga & Vanadzina, Evgenia & Viljainen, Satu, 2016. "Linking the energy-only market and the energy-plus-capacity market," Utilities Policy, Elsevier, vol. 38(C), pages 52-61.

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    Keywords

    Transmission rights; Interconnector; Valuation;

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