Financial Transmission Rights (FTRs) are used to hedge congestion risk and they are financed by congestion rents. The ISO may not collect enough congestion rents to cover its obligation to the FTR holders; this is known as revenue inadequacy. Revenue inadequacy may occur even though ISOs run a Simultaneous Feasibility Test (SFT), which ensures revenue adequacy. However, the SFT relies on the assumption that the grid topology is not modified. Recent research suggests that we should co-optimize generation with the network topology. There is the concern that optimizing the topology will cause revenue inadequacy. In this paper, we examine how transmission switching affects revenue adequacy of FTRs. We discuss how the optimal transmission switching problem can be modified in order to maximize the market surplus subject to maintaining revenue adequacy, if that is the desired motivation of the ISO. We also discuss the policy implications of adopting such a method.
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