Optimal congestion treatment for bilateral electricity trading
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Authors
Neuhoff, Karsten
Publication Date
2004-06-16Series
Cambridge Working Papers in Economics
Publisher
Faculty of Economics
Language
en_GB
Type
Working Paper
Metadata
Show full item recordCitation
Neuhoff, K. (2004). Optimal congestion treatment for bilateral electricity trading. https://doi.org/10.17863/CAM.5001
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.
Keywords
Classification-JEL: D43, D61, L50, L94, Electricity Networks, Constraint Management, Market Design, Bilateral Trading
Identifiers
This record's DOI: https://doi.org/10.17863/CAM.5001
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