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Rethinking the Role of Financial Transmission Rights in Wind-Rich Electricity Markets in the Central U.S.

Rethinking the Role of Financial Transmission Rights in Wind-Rich Electricity Markets in the Central U.S.

Full Title: Rethinking the Role of Financial Transmission Rights in Wind-Rich Electricity Markets in the Central U.S.
Author(s): James Hyungkwan Kim, Mark Bolinger, Andrew D. Mills, Ryan Wiser
Publisher(s): International Association for Energy Economics Energy Journal
Publication Date: January 30, 2023
Full Text: Download Resource
Description (excerpt):

Transmission congestion can cause a divergence between wholesale power prices at the individual pricing nodes where power is generated and the more-liquid trading hubs where that power is often delivered and sold. This nodal price difference is commonly referred to as the “locational basis” (or just “basis”). Because the basis varies over time, it can, if not hedged, unpredictably affect a wind plant’s revenue and/or value, which increases investor risk and potentially slows deployment. We find wind plants typically face a larger and more-negative basis than do thermal generators, and hence are more-negatively impacted by congestion. Moreover, while most thermal generators can effectively hedge basis risk by purchasing conventional fixed-volume financial transmission rights (FTRs), these fixed-volume FTRs do not effectively hedge basis risk for variable wind generation. More-effective hedging mechanisms may be required to support those generators most-impacted by congestion, and to promote continued investment in variable generation resources in congested markets.

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