Long-term transmission rights in the Nordic electricity markets: An empirical appraisal of transmission risk management and hedging

摘要

The increasingly integrated European electricity markets enable participants to exploitmarket opportunities and participate in cross-border electricity trading. But, the networkgets congested because of the scarce transmission capacity, so electricity prices varygreatly in time and across geographical areas. Market participants thus need an efficienthedging mechanism that limits their exposure to the locational price risks. The hedgingsolutions against the area price differences that originate from interconnector congestionare commonly called long-term transmission rights (LTRs).This work studies the economics of transmission network congestion in the Nordicelectricity markets, including the associated risks and alternative LTR mechanisms andhow to manage them. The Nordic electricity markets are selected as a case study fortheir unique market design and the current regulatory challenge they face with respect toefficiency limits identified in their transmission risk hedging contracts, called electricityarea price differentials (EPADs). In addition to the policy and regulatory motivations,the current understanding of derivatives pricing for non-storable commodities, such aselectricity, is limited. In particular, the interpretation of the systematic bias betweenfutures prices and the expected delivery date spot prices, called risk premia, is stillambiguous in terms of economic theory.This study employs historical data (2001–2014) on electricity spot and futures marketsand utilizes statistical and econometric methods to empirically assess the efficiency ofthe current Nordic transmission hedging mechanism and to evaluate LTR alternatives(FTR and EPAD Combo). Three main findings may be highlighted. First, despite thepresence of systematic price differences between bidding zones and the referencesystem price, the real economic impacts of these differences are limited. Net-importingbidding zones are identified as the most vulnerable to systematic decoupling of prices.Second, despite the significant risk premia in EPAD contracts, the study finds thatEPAD prices are unbiased predictors of the expected spot prices in the long run. Third,the study shows that financial transmission rights (FTRs) hedging effects can bereplicated by combinations of EPAD contracts and that the TSOs theoreticallyauctioning FTR portfolios would need to newly address firmness risks, revenueadequacy, and counterparty risks.