Framework for the Design and Analysis of Congestion Revenue Rights

Abstract

The capability to deal effectively with the uncertainty associated with locational marginal prices (LMPs) in congestion management schemes requires the development of appropriate financial tools. Congestion revenue rights (CRR) are hedging tools that provide the holder reimbursement of the congestion charges in the day-ahead market and thereby provide transmission service customers with price certainty. In this paper, we construct a framework for the design and analysis of the CRR by marrying finance theory notions with salient characteristics of electric power systems and electricity markets. The framework consists of three interconnected layers with one layer each to represent the models of the transmission network, the commodity markets and the CRR financial markets. The interaction between the layers is represented as information flows. The framework has sufficient scope to allow the analysis of a broad range of problems associated with ensuring price certainty for transmission services. The structural modularity of the framework provides the flexibility to analyze issues and design structures for the provision of transmission services in the competitive environment. We introduce a new notion of CRR payoff parity and a practical pricing scheme, which are used as the basis for the design of more liquid CRR markets. The application of the framework is further illustrated by the analysis of the conditions that guarantee the revenue adequacy for the CRR issuer.