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Optimal congestion treatment for bilateral electricity trading

Author

Listed:
  • Karsten Neuhoff

    (University of Cambridge)

Abstract

How to treat transmission constraints in electricity markets that are not based on a pool but on bilateral trading? Three approaches are currently discussed: First, the system operator resolves constraints and socialises costs; second, physical transmission contracts; third, locational charging with the option of financial hedging. Socialisation of costs for constraint resolution results in inefficient dispatch and incorrect incentives for investment in generation. Physical contracts and locational charging designs have identical properties in a very simplified model world, but differ if transaction costs, illiquid markets and uncertainty about demand are considered. Physical transmission contracts are best designed as zonal access rights, but have to be centrally administered to be efficient. Only locational charging can cope with uncertainty and volatility of electricity demand efficiently and non-discriminatory. Qualitative arguments allow ranking of designs involving physical contracts and locational charging. Comparison with a system operator socialising costs requires network specific analysis.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Karsten Neuhoff, 2002. "Optimal congestion treatment for bilateral electricity trading," Working Papers EP05, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:ep05
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    Cited by:

    1. Brunekreeft, Gert & Neuhoff, Karsten & Newbery, David, 2005. "Electricity transmission: An overview of the current debate," Utilities Policy, Elsevier, vol. 13(2), pages 73-93, June.
    2. Karsten Neuhoff, 2003. "Integrating Transmission and Energy Markets Mitigates Market Power," Working Papers EP17, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.

    More about this item

    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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