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Designing Hedging Instruments for Locational Price Risks – Lessons from North American Financial Transmission Rights

Author

Listed:
  • Leon Stolle
  • Jonas Boeschemeier
  • Benjamin F. Hobbs
  • Karsten Neuhoff

Abstract

Locational marginal pricing (LMP) provides efficient locational dispatch and investment signals but requires a complementary congestion hedging instrument to function effectively. This paper investigates how exposure to locational price differences is managed in North American nodal electricity markets through the implementation of financial transmission rights (FTRs). Drawing on insights from 15 industry experts directly involved across all major North American electricity markets, we consolidate first-hand perspectives that reveal the practical complexities of FTR design and implementation. While most interviewees view FTRs positively, their experiences uncover multiple nuanced challenges to successfully design locational hedging instruments, which are often overlooked in the academic literature. As FTR design depends on market characteristics, we apply the findings to the European electricity market and discuss implications for a possible implementation of LMP in Europe.

Suggested Citation

  • 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.
    • Handle: RePEc:diw:diwwpp:dp2156
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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