Value of a Transmission Congestion Contract

Abstract

This paper investigates the individual agent's incentive for setting Transmission Congestion Contract (TCC) magnitudes and its consequences in a POOLCO model of electric power market. TCCs do not completely solve the externality problem in an electric power market. Specifically, a TCC can have a negative value. The owner of a negative-valued TCC will set the TCC magnitude equal to zero, which affects other agents' TCC settings and the incentive for grid modification. After disappearance of the negative-valued TCCs, not all TCCs match the actual dispatch because of the feasibility constraint. And hence, an agent may have an incentive for a detrimental grid modification. We present one such example. We suggest that for the allocation of transmission congestion rents in a POOLCO model, POOLCO's role need include the allocation of true congestion rents, i.e., solving the externality problem in an electric power market.

JEL Classification: K20, L51, L52, L94