On the Efficiency of the New York Independent System OperatorMarket for Transmission Congestion Contracts
The physical nature of electricity generation and deliverycreates special problems for the design of efficient markets, notably theneed to manage delivery in real time and the volatile congestion andassociated costs that result. Proposals for the operation of thederegulated electricity industry tend towards one of two paradigms:centralized and decentralized. Transmission congestion management can beimplemented in the more centralized point-to-point approach, a in NewYork state, where derivative transmission congestion contracts (TCCs) aretraded, or in the more decentralized flowgate-based approach. While it iswidely accepted that theoretically TCCs have attractive properties ashedging instruments against congestion cost uncertainty, whetherefficient markets for them can be established in practice has beenquestioned. Based on an empirical analysis of publicly available datafrom years 2000 and 2001, it appears that New York TCCs providedmarketparticipants with a potentially effective hedge against volatilecongestion rents. However, the prices paid for TCCs systematicallydiverged from the resulting congestion rents for distant locations and athigh prices. The price paid for the hedge not being in line with thecongestion rents, i.e. unreasonably high risk premiums are being paid,suggests an inefficient market. The low liquidity of TCC markets and thedeviation of TCC feasibility requirements from actual energy flows arepossible explanations.
- Research Organization:
- Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States)
- Sponsoring Organization:
- US Department of Energy. Assistant Secretary for EnergyEfficiency and Renewable Solar and Renewable ResourceTechnologies
- DOE Contract Number:
- DE-AC02-05CH11231
- OSTI ID:
- 918803
- Report Number(s):
- LBNL-52386; R&D Project: 673323; TRN: US200819%%449
- Journal Information:
- Managerial Finance, Vol. 31, Issue 6; Related Information: Journal Publication Date: 06/2005
- Country of Publication:
- United States
- Language:
- English
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