Optimal congestion treatment for bilateral electricity trading

Karsten Neuhoff ()

Cambridge Working Papers in Economics from Faculty of Economics, 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.

Keywords: Electricity Networks; Constraint Management; Market Design; Bilateral Trading (search for similar items in EconPapers)
JEL-codes: D43 D61 L50 L94 (search for similar items in EconPapers)
Pages: 26
Date: 2002-05
New Economics Papers: this item is included in nep-ene and nep-reg
Note: CMI IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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