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A bi-level framework to analyse the use of FTRs as a long-term risk hedging instrument in the European electricity context

S. Gómez, L. Olmos, A. Ramos, M. Rivier


A large portion of Renewable Energy Sources generation investments occurs in remote areas, which are normally weakly connected to the rest of the system. Hence, relevant congestion arises in the network linking these areas to the main load centres, where prices tend to be more stable. Congestion drives significant changes in the electricity price in remote areas that are difficult to predict. As a result, investors in remote areas face relevant long-term market price risk, which may prevent them from undertaking some socially beneficial generation investments. In this study, we assess the impact of the implementation of Long-Term Financial Transmission Rights on the efficiency of the system's expansion as a potential tool to hedge the market price risk caused by network congestion faced by generation investors in remote areas. We represent the effect of market price risk on generation investors’ profits through the Conditional Value at Risk of these profits, considering uncertainty factors affecting the price earned by the corresponding generators. The socially optimal expansion of the system, considering Long Term FTRs, is formulated as a bi-level optimization problem, converted into a MPEC making use of Karush-Kuhn-Tucker conditions. As a representative case study, we take the European power system, where the development of renewable generation in remote areas, such as the North Sea, has significant potential. Based on our computed results, we conclude that the availability of FTRs to manage the price risk perceived by risk-averse generation companies in remote areas should trigger a relevant increase in the system's social welfare and could also lead to relevant changes in the generation and, potentially, in the transmission socially optimal investment decisions, involving additional generation investments in remote areas, particularly in the North Sea within the European system.

Palabras clave: FTRs, generation expansion planning, transmission expansion planning, risk management.

Fecha de Registro: 04/06/2024


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