Research

Publications

Prospective Students

Events

People

Search

Seminars

Links

Home

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