Convergence bids and market manipulation in the California electricity market

Caroline Hopkins

Energy Economics, 2020, vol. 89, issue C

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.

Keywords: Electricity market; Financial instruments; Congestion revenue rights; Convergence bids; Market manipulation (search for similar items in EconPapers)
JEL-codes: G1 L1 L5 L9 Q4 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:89:y:2020:i:c:s0140988320301584

DOI: 10.1016/j.eneco.2020.104818

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