Risk and abnormal returns in markets for congestion revenue rights

Abstract

In organized energy markets that use locational pricing, power generators and energy suppliers procure financial transmission rights (FTRs) to hedge against grid congestion charges, while third-party speculators attempt to capture a return with these extremely volatile contracts. This paper develops a novel methodology for estimating the systematic risk of individual FTRs and detecting the presence of abnormal returns among these financial instruments. The prevalence of congestion paths with abnormal returns could be used by policy experts as an efficiency measure when assessing the performance of FTR markets. Being the only organized energy market in the Western Interconnection, California has implemented a version of FTRs officially known as congestion revenue rights (CRRs). This paper applies the proposed methodology to all auctioned CRRs from 2009 to 2015. Our analysis identifies the paths that exhibit persistent abnormal returns, with the majority of them being positive. We also compare the patterns of risk and abnormal returns between on-peak and off-peak CRRs, and find no significant differences.

Price Formation in Auctions for Financial Transmission Rights

“…Previous studies have examined the efficiency of FTR auctions (Adamson et al, 2010;Deng et al, 2010;Olmstead, 2018) and analyzed the presence of abnormal returns in FTR markets (Baltadounis et al, 2017). While our empirical finding that FTR auction prices diverge from their ex post value is consistent with the literature, we differentiate ourselves from these previous studies by focusing on the role of FTR supply (or lack thereof) in determining an FTR's equilibrium auction price.…”

“…Adamson et al (2010) examine FTR returns in the New York ISO in the earliest years of FTR auctions and find that transactions profits declined as the market matured. Baltadounis et al (2017) study FTRs in a capital asset pricing model (CAPM) framework where they test whether specific source/sink pairs experience "abnormal" returns relative to the entire market's returns. Using an ex post evaluation of FTR returns in California from 2009-2015, they find that about half of the FTR source/sink pairs studied in California displayed returns statistically different from average market levels (i.e., abnormal returns).…”

Risk Management in Electricity Markets: Dominant Topics and Research Trends

“…In this regard, there are studies that propose bilateral contracting schemes based on forecast models (Gandelli et al 2003) and a Monte Carlo simulation (Yucekaya 2022). In addition, there are studies that estimate the systematic risk of FTRs (financial transmission rights) (Baltaduonis et al 2017). These instruments are used for hedging purposes for congestion charges.…”

Congestion Risk, Transmission Rights, and Investment Equilibria in Electricity Markets

“…3 Real-world FTR markets have encountered an array of challenges. Key among these is the empirical finding across multiple markets showing that FTR payouts regularly exceed auction proceeds, at significant expense for ratepayers (Baltaduonis et al, 2017; Leslie, 2021; Opgrand et al, 2022). Several explanations have been proposed for this finding, including the inherent risk in the assets and information asymmetries between market participants.…”

“… 3. Several works (e.g., Bartholomew et al, 2003; Deng et al, 2004; Siddiqui et al, 2005; Zhang, 2009; Hadsell and Shawky, 2009; Adamson et al, 2010; Deng et al, 2010; Baltaduonis et al, 2017; Olmstead, 2018; Leslie, 2021; Opgrand et al, 2022) investigate and discuss the efficiency of FTR markets, with no consensus on whether the markets are inherently inefficient. …”