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2004-05 Seminars
Electricity
Financial Transmission Rights as Hedging Instruments
Dalia
Patino Echeverri
Carnegie Mellon University
Abstract
Deregulation of the electricity
markets has made participants face much larger uncertainties in a
competitive environment. In this paper we focus on one aspect of this
problem: transmission congestion costs, which represent a significant
fraction of the total cost of electricity and are difficult to predict. A
system of auctions of Financial Transmission Rights (FTR) has been
implemented in different regions to allow market forces to alleviate the
burden of uncertain congestion costs to market participants. Data from
NYISO and PJM markets show that in practice market participants are paying
a fixed cost with a large premium to minimize their exposure to the
uncertainty of the congestion costs. We developed an option theory based
framework to quantify the value of the risk reduction and illustrate how
it can be applied to the case of the premium paid for FTRs to hedge
against the volatility of the congestion costs.
Slides |
