LMP and FTR in the standard market design

Abstract

Prior to competitive electricity markets, transmission rights are typically physical rights which are required to schedule physical MW flows across the grid requires physical rights. To alleviate overloads, schedules may be curtailed based on the relative priority of their physical transmission rights. In the locational marginal pricing (LMP)-based congestion management scheme, energy bids are deployed, based on their relative cost-effectiveness, to maintain grid security. When resources are dispatched out of merit to maintain grid security, one can expect price (LMP)-separation across the transmission network. All transmission customers are subjected to congestion charges that are based on differences in LMP between the point of withdrawal and point of injection. To hedge the risk of congestion charge, financial transmission rights (FTR) may be acquired which entitles the owner of FTR to receive congestion credits. Congestion credits are assigned to the FTR owners without regards to whether physical MWs had actually flowed. The credit could be positive or negative. Negative credits would obligate the FTR owner to pay.