EBF 483
Introduction to Electricity Markets

10.0 Introduction


You may remember earlier in the course, when we were discussion transmission congestion and Locational Marginal Prices, that in the presence of transmission congestion the RTO winds up with extra money left over after paying the generators the LMP at their location for all energy produced. We had called this extra money the "congestion rent" or the "merchandizing surplus" and you may still be wondering what the RTO does with that extra money.

In this lesson we'll see how the congestion rent is tied up with one of the key ways that suppliers and consumers can hedge volatility in LMPs. These financial instruments, known as Financial Transmission Rights or FTRs, are the main topic of this lesson.

Learning Outcomes

By the end of this lesson, you should be able to:

  • Identify the difference between temporal and locational risk in an electricity market.
  • Define a Financial Transmission Right and a Contract for Differences in electricity markets.
  • Calculate the spark spread
  • Calculate the value of a Financial Transmission Right
  • Construct a perfect hedge using Financial Transmission Rights and Contracts for Differences

Lesson Roadmap

Lesson 10 Roadmap
To Read Online course material This course web site
To Do Homework Assignment 10 Submission in Canvas


If you have questions, please feel free to post them to the General Questions and Discussion forum in Canvas. While you are there, feel free to post your own responses if you, too, are able to help a classmate.