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Managing the Risks of Congestion - FTRs and ARRs
When transmission congestion occurs, LMPs vary throughout the power grid and may cause the ISO to collect more revenue from demand in congested areas than it will pay to generators supplying electricity to those areas. This over-collection is called "congestion revenue."
To hedge, or protect, against the adverse impacts of having to pay higher LMPs, market participants are able to bid for the rights to a share of the congestion revenue through monthly and long-term Financial Transmission Right (FTR) auctions. The FTR is a financial instrument that entitles the holder to compensation for costs associated with transmission congestion between two locations in the day-ahead market.
Auction Revenue Rights (ARRs) are rights created to transfer the proceeds from each FTR auction to certain entities responsible for paying for transmission upgrades and to those who pay the congestion costs associated with supplying energy to serve demand.
While variations in LMPs can provide incentives for efficient market operation, this volatility also creates uncertainty for market participants, especially for those responsible for serving demand in congested areas. FTRs and ARRs help market participants manage their congestion-related risks.
In the End
SMD reflects the implementation of market improvements that were deemed necessary at the origin of wholesale free-market competition in New England.
LMP reveals the true cost of serving demand at particular locations throughout the bulk power grid and indicates where investment in the system is needed. The multi-settlement system provides a mechanism to hedge against the volatility of real-time prices and provides the correct price signals to influence economic and efficient real-time market behavior. FTRs and ARRs help market participants protect against higher wholesale prices caused by congestion costs.
And through standardization, SMD reduces seams between New England and other markets in the Northeast that will increase competition and trading choices for wholesale market participants.
Overall, the goal of SMD is to provide New England a market with fair and understandable rules that promote greater economic efficiency and competition, promote power system reliability and provide reasonable wholesale electricity prices.
