ArticleFlow-Based Transmission Rights and Congestion Management
Section snippets
Basic Principles of Transmission Rights
Transmission rights are so fundamental to an efficient design of competitive electricity markets that their definition must be an integral part of market rules and should not be designed by private commercial entities afterward. The specification of transmission rights, however, is complicated by externalities due to loop flows. Since the actual power flows in an electrical network observe the physical laws known as Kirchhoff's Laws, the power flow paths generally diverge from the intended
Advantages of Flow-Based Transmission Rights
Flow-based transmission rights, or flowgate rights for short, have several attractive features. The most important feature is that flowgate rights can be defined independently of the pattern of power flows. The feasible quantity of flowgate rights on each link is not sensitive to the topology of the network or to varying load conditions. The market value of such rights varies, of course, but the physical availability of transfers does not; hence, the quantities of available rights do not need
A Competitive Electricity Market Design
This section describes in nontechnical language the basic design of a wholesale market for electricity with a flow-based transmission rights system. First, one should be aware that each market design is in essence a creative contrivance, entailing intricate interactions of economic incentives and technical requirements. No matter how compelling the arguments may be, a market design should be carefully evaluated and tested in light of overall design objectives before implementation. There are at
A Numerical Example
To illustrate how the basic principles work, we consider a simple numerical example. We assume a market structure with two separate institutional entities: a system operator (SO) and a power exchange (PX). Basically, the SO manages the central dispatch and spot market, while the PX facilitates the forward markets. In the centrally coordinated dispatch process, the SO continually balances electricity supply and demand requirements by scheduling generation to meet electricity demand. In
Discussion
Some objections have been raised against a flow-based approach. In a generally positive article in The Electricity Journal, Steven Stoft was skeptical that this approach could be implemented in a decentralized manner.36 To support his skepticism, he adduced two arguments.
First, Stoft explained that the tradable transmission right approach is complex. When one trader seeks to buy the transmission rights
Conclusion
The externalities due to loop flows in a transmission network represent a critical issue that must be resolved before competition can be successfully introduced into the electric power industry for long-term economic benefits. The main insight is that a system of flow-based transmission rights enables market-based congestion management for efficient energy and transmission markets. Further, once a system of tradable flowgate rights is established, the control of the transmission system is
Hung-po Chao is Area Manager of Policy and Risk Analysis & Power Market Design at the Electric Power Research Institute (EPRI), Palo Alto, CA, and is Consulting Professor of Management Science and Engineering at Stanford University. In 1999, Dr. Chao led a study for the Taiwan government assessing Taiwan's electricity liberalization strategy. Currently, he assists NEPOOL and ISO New England on market decision issues. Dr. Chao holds a Ph.D. degree in operations research from Stanford.
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Hung-po Chao is Area Manager of Policy and Risk Analysis & Power Market Design at the Electric Power Research Institute (EPRI), Palo Alto, CA, and is Consulting Professor of Management Science and Engineering at Stanford University. In 1999, Dr. Chao led a study for the Taiwan government assessing Taiwan's electricity liberalization strategy. Currently, he assists NEPOOL and ISO New England on market decision issues. Dr. Chao holds a Ph.D. degree in operations research from Stanford.
Stephen C. Peck is Technical Executive of the Environment Division at EPRI. He has served as a member of the economics faculty of the University of California, Berkeley, and a member of the NAS/NRC Committee on Global Energy and Associated Ecological Problems. He holds a Ph.D. in business economics from the University of Chicago.
Shmuel S. Oren is Professor of Industrial Engineering and Operations Research at the University of California at Berkeley and a former chairman of that department. He is the Berkeley site director of PSerc, a multi-university Power Systems Engineering Research Center. Dr. Oren has been a consultant on electricity restructuring issues to the Brazilian Electricity Regulatory Agency (ANEEL) and to the Texas Public Utility Commission. He holds a Ph.D. in engineering economic systems from Stanford.
Robert B. Wilson holds the McBean Chair of Economics at Stanford Business School. He is an elected member of the National Academy of Sciences and the American Academy of Arts and Sciences. Dr. Wilson advises the California Power Exchange, the California and New England independent system operators, and others on the design of wholesale electricity markets. He holds a D.B.A. degree from Harvard University. The authors thank Steven Stoft, Larry Ruff, and William Hogan for helpful comments. They may be contacted via email at [email protected].