Market incompleteness in regional electricity transmission. Part II: the forward and real time markets

Yves Smeers

No 2002077, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: The paper extends our previous analysis of market incompleteness to the case where there exist both a forward and real time market. The discussion is conducted with reference to a two-stage framework commonly used in stochastic programming and finance, but also familiar to the power industry. The paper considers two market designs. The first organization assumes that physical transmission services are auctioned in the forward market. The second organization supposes a financial market of transmission services. We recover the known perfect hedging property of nodal pricing and show that the flowgate model does not share this property. A standard proposition in finance is that market completeness requires that the number of tradable instruments is equal to or exceeds the number of risk factors. We show that none of the nodal or flowgate models satisfy this property. Other instruments, of the option type, should thus be introduced in these systems in order to better trade risk and complete the market.

Date: 2002-12
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