Paper - Mossavar-Rahmani Center for Business & Government

Financial Transmission Right Formulations

| March 31, 2002

Physical transmission rights present so many complications for a restructured electricity market that some other approach is required. With a standard market design centered on a bid-based, security-constrained, economic dispatch with locational prices, the natural approach is to define financial transmission rights that offer payments based on prices in the actual dispatch. Different models have been proposed for point-to-point and flowgate rights, obligations and options. A consistent framework provides a comparison of alternative rights. The comparison addresses issues of modeling approximations, revenue adequacy, auction formulation and computational requirements. In the case of point-to-point obligations, the practical feasibility of the approach has been demonstrated using adaptations of dispatch software. In the case of point-to-point options, the computational strategies could be extended and might also work but have not been demonstrated. In the case of flowgate rights in the full definition, the computational approach available from dispatch software no longer applies and something new would be required. Or the flowgate implementation might include restrictions that would compromise the value of flowgates as hedges.

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For Academic Citation: Hogan, William W.. “Financial Transmission Right Formulations.” Paper, Mossavar-Rahmani Center for Business & Government, March 31, 2002.