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‘Definition of a Balancing Point for Electricity Transmission Contracts’


  • Olmos, L.
  • Neuhoff, K.


Electricity transmission contracts allocate scarce resources, allow hedging against locational price differences and provide information to guide investment. Liquidity is increased if all transmission contracts are defined relative to one balancing point, then a set of two contracts can replicate any point to point contract. We propose an algorithm and apply it to the European electricity network to identify a well connected balancing point that exhibits minimal relative cross-price responses and hence reduces market power exercised by generation companies. Market level data which is difficult to obtain or model such as price levels in different regions or that is dependent on the time scale of interaction, as demand elasticity, is not required. The only critical input quantities are assumptions on future transmission constraint patterns.

Suggested Citation

  • Olmos, L. & Neuhoff, K., 2004. "‘Definition of a Balancing Point for Electricity Transmission Contracts’," Cambridge Working Papers in Economics 0424, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0424
    Note: CMI40 IO

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    References listed on IDEAS

    1. Richard Gilbert & Neuhoff, K. & Newbery, D., 2002. "Allocating Transmission to Mitigate Market Power in Electricity Networks," Cambridge Working Papers in Economics 0225, Faculty of Economics, University of Cambridge.
    2. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March.
    3. 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.
    4. Neuhoff, K., 2003. "Integrating Transmission and Energy Markets Mitigates Market Power," Cambridge Working Papers in Economics 0310, Faculty of Economics, University of Cambridge.
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    More about this item


    Transmission contract design; Congestion management; Market Power; European electricity network;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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