Financial Transmission Rights: Analysis, Experiences and Prospects

441 Pages·2013·4.138 MB·English

by  William W. Hogan (auth.), Juan Rosellón, Tarjei Kristiansen (eds.)

Lecture Notes in Energy 7
Juan Rosellón
Tarjei Kristiansen Editors
Financial
Transmission
Rights
Analysis, Experiences and Prospects
Lecture Notes in Energy 7
For furthervolumes:
http://www.springer.com/series/8874
.
Juan Rosello´n (cid:129) Tarjei Kristiansen
Editors
Financial Transmission
Rights
Analysis, Experiences and Prospects
Editors
JuanRosello´n TarjeiKristiansen
CentrodeInvestigacio´nyDocencia A˚sega˚rdsvegen65
Econo´micas(CIDE)andGerman 6017A˚lesund
InstituteforEconomicResearch Norway
Divisio´ndeEconom´ıa
Mexico,Mexico
GermanInstituteforEconomic
Research(DIWBerlin)
Berlin
Germany
ISSN2195-1284 ISSN2195-1292(electronic)
ISBN978-1-4471-4786-2 ISBN978-1-4471-4787-9(eBook)
DOI10.1007/978-1-4471-4787-9
SpringerLondonHeidelbergNewYorkDordrecht
LibraryofCongressControlNumber:2013931659
#Springer-VerlagLondon2013
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Preface
Efficient operationand optimal expansionofthe transmissionnetworksystem are
some of the most complex and challenging issues that we are faced with in
operationalmarketandregulatorypolicydesignforliberalisedelectricitymarkets.
Financial transmission rights (FTRs) – the theme of this book – represent an
interestingandwelcomeadditiontothe“boxoftools”ofmarket-based,regulatory
instrumentsandmechanismsforeffectivenetworkoperationandregulation.
The actual, real-world situation in most liberalised electricity markets is
characterised with insufficient investment in the transmission network, resulting
inbindingcapacityconstraints,networkcongestion,andwelfarelossestosociety,
compared to an optimal expansion path. Inadequate operational rules for the
handling of such constraints have added to the failure of the regulatory system to
effectivelycopewithnetworkissuesofalong-termaswellasashort-termnature.
Theambitionoftheeditorsofthebook–JuanRosello´nandTarjeiKristiansen–
has been to produce a book that can be “an accessible source to researchers and
professionals working with financial transmission rights (FTRs) and electricity
market regulation”. I think that they have admirably succeeded in their objective
andtask.Thecollectionofchapterspresentsanup-to-datesurveyandstocktaking
ofFTRsasaregulatorypolicyinstrument,withawell-balancedblendoftheoretical
andpracticalcontributions.Theeditorsshouldalsobecreditedfornotoverstating
thecaseforFTRsinelectricitymarketandnetworkregulation,pointingtosomeof
their weaknesses and limitations, e.g. in relation to optimal transmission invest-
ment, and emphasising the need for coordinating the use of FTRs with other
regulatoryinstrumentstoachievestatedpolicyobjectives.
A fundamental question in electricity market design is to what extent market
transactions and price formation in electricity markets should be separated from
considerations of transmission constraints and network congestion issues. I think
there are strong arguments for adopting a two-step procedure: first, establishing
prices inefficientlyfunctioning electricity markets and, then, solving the network
problems that this market allocation may create, rather than in one simultaneous
operation.Inparticular,iftransmissionnetworkandtransmissionsystemoperation
v
vi Preface
issuesareallowedundulytosettheagendaformarketoperations,wemayendup
withanimperfectlyfunctioningmarketsystemasatotality.
Insuchaperspective,FTRsmaybeconsideredasabridgingor“intermediary”
instrumentbetweenthemarketandnetworkpartsofthesystem.Theprimaryroleof
FTRs, as I see it, at least at this stage of development of market design, is to
function as a transmission congestion risk hedging instrument, comparable to the
role that financial derivatives play as hedging instruments on the market side. To
further develop andintroduce FTRs inthiscapacityshouldbe aregulatorypolicy
priority. Further research and refinement seem to be needed before FTRs can be
introduced effectively as an instrument for transmission network investment, for
mitigating market power, and for dealing with other regulatory issues and
challenges arising in a liberalised electricity market system. The book also gives
well-foundedguidanceanddirectionforsuchresearchandrefinement.
Einar Hope is Professor Emeritus at the Norwegian School of Economics (NHH)
andPastPresidentoftheInternationalAssociationforEnergyEconomics(IAEE).
“The essays in this book cover the latest thinking on alternative mechanisms to
manageefficientlyscarcetransmissioncapacity,tosetpricesforusingtransmission
networkstorecovertheircapitalandoperatingcosts,andtoprovidegoodincentives
for transmission network operation and investment. Anyone interested in frontier
thinkingandpracticeontheseissueswillbenefitfromreadingtheessaysinthisbook.”
PaulL.Joskow,President,AlfredP.SloanFoundation(NewYork,NY)andElizabeth
andJamesKillianProfessorofEconomics,Emeritus,MIT(Cambridge,MA).
“Thisbookfromleadingexpertsinthefieldfinallyprovidesacomprehensiveoverview
of theory and practice of financial transmission rights (FTRs). FTRs are a central
elementofsuccessfulpowermarketdesign.Theyallowgenerationandloadtoaddress
the financial risk of congestion in the transmission network and thus manage the
impactsofincreasingdeploymentofwindandsolarpower.Readthisbooktolearn
how the FTRs can be part of long-term energy contracting, and thus facilitate
investmentingenerationandtransmissioncapacity.”
KarstenNeuhoff,HeadofDepartmentClimatePolicy,DIWBerlin
“Juan Rosello´n, a leading researcher with experience as regulator, and Tarjei
Kristiansen,abusinesspersonwithstrongacademicrecords,aretheidealcombina-
tionofacademicbackground,hands-onexperience,andvisionarythinkingtoassem-
ble–jointlywithwell-knownco-authors–thisvolumethatallowsthereadertoassess
issuesaboutfinancialtransmissionrights,andtoweighpotentialfutureapplications
butalsothelimitsthereof.”
Christian von Hirschhausen, Chair of Infrastructure Policy, Berlin University of
Technology
vii
.
Acknowledgment
JuanRosello´nacknowledgesthathisworkduringtheelaborationofthisbookwas
carriedoutusingsupportoftheEuropeanUnion,throughaMarieCurieIncoming
InternationalFellowship,andofConacyt(p.131175).
ix