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Analysis

Basic Financial Transmission Rights

Wed, 02/24/2016 - 11:45

One of the new instruments intended to help the development of the wholesale electricity market is financial transmission rights (FTRs). The Ministry of Energy’s Undersecretary of Electricity, César Hernández Ochoa, discloses that incidents such as the Enron Crisis in California were the catalyst for the creation of innovative regulations that take into account nodal prices and congestion costs. Financial transmission rights can mitigate the latter and they have been tested and proven in other markets, such as by PJM Interconnection in the US, which has been using this instrument for 15 years.

CENACE’s Director General, Eduardo Meraz, explains that when a line becomes congested, then electricity has to be generated using more expensive plants located in other spots. “Purchasers are reluctant to pay for the variation in price between the two spots,” he points out. Hérnandez Ochoa details that FTRs are instruments that put a price on congestion so that generators can be confident of their ability to deliver electricity at the established price.

Meraz sees FTRs as a type of insurance that guarantees security to electricity purchasers because the price of electricity will not vary when the transmission lines become congested. “With the FTRs, purchasers have the variations in price dictated by congested lines covered. This is particularly important because Mexico will be implementing a nodal market, which entails regional price variations.” In cases where generators wish to sell their electricity in the consumption point, they will assume the risk of price volatility from the purchaser. Conversely, when the generator sells in the generation point, then the purchaser has the option of buying its own financial transmission rights.

Since the instrument is negotiable because it is a financial right, explains Hernández Ochoa, it is possible to buy and sell, so a generator can buy excess energy from another party if needed to fulfill its contract. He also points out that due to the instrument’s complexity, it will not be implemented until six months after the wholesale market is launched..