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In the dynamic world of electricity markets, congestion rent mechanisms play a pivotal role in determining transmission costs, market efficiency, and financial risk for participants. Two prominent markets, Markets+ and EDAM, have distinct approaches to handling congestion pricing and allocation. Understanding these mechanisms is crucial for market participants aiming to navigate the complexities of the energy industry effectively.
In this blog post, you’ll learn about the congestion rent mechanisms in Markets+ and EDAM, their impact on transmission costs, market efficiency, and financial risk for participants. We’ll explore the key differences between these markets and how each approach influences the broader energy landscape.
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How Markets+ handles congestion rent
Markets+, proposed by the Southwest Power Pool (SPP), has a unique approach to congestion rent allocation. The mechanism is designed to ensure that transmission customers receive a fair share of congestion rents while maintaining market operator revenue neutrality.
Congestion rent allocation: In Markets+, congestion rent allocation is based on OATT transmission service reservations (TSRs) rather than schedules. This means that long-term firm network and point-to-point (PTP) service rights holders are the primary recipients of congestion rents. The allocation is determined by mapping each eligible TSR to a source/sink pair and calculating the differential between the marginal cost of congestion (MCC) at the source and sink locations.
Revenue neutrality: The total congestion rent allocated to transmission customers equals the total congestion rent collected by the market operator for each hour. This ensures that the market operator remains revenue neutral, avoiding the need for uplift charges or other true-ups.
Impact on transmission costs: By allocating congestion rents based on prevailing flows and ensuring revenue neutrality, Markets+ aims to provide a transparent and predictable framework for managing transmission costs. This approach encourages investment in long-term transmission service and helps mitigate financial risks for participants.
How EDAM handles congestion rent
The Extended Day-Ahead Market (EDAM), proposed by the California ISO (CAISO), builds on the existing Western Energy Imbalance Market (WEIM) framework. EDAM’s congestion rent mechanism is designed to allocate revenues in a way that supports market efficiency and equitable distribution among participants.
Congestion revenue allocation: In EDAM, congestion revenue is collected when transmission constraints or intertie scheduling limits bind, causing variations in the locational marginal price (LMP) across the transmission system. The revenue is allocated to the EDAM entity on whose transmission system the constraint materialized, ensuring that the entity responsible for resolving the constraint receives the associated revenue.
Transfer revenue allocation: EDAM also includes provisions for transfer revenue allocation. When energy, imbalance reserve, or reliability capacity is transferred between balancing authority areas (BAAs) within the EDAM area, the associated transfer revenue is shared between the BAAs. The default allocation is a 50:50 split, except for specific cases where transmission customers are allocated a full share of transfer revenue associated with their transmission rights.
Impact on transmission costs: By allocating congestion and transfer revenues to the entities responsible for managing constraints, EDAM promotes efficient grid operation and cost recovery. This approach helps balance financial risks and rewards for market participants, encouraging proactive management of transmission constraints.
Key differences and their implications
While both Markets+ and EDAM aim to manage congestion rent effectively, their approaches have distinct implications for transmission costs, market efficiency, and financial risk.
Markets+: The focus on OATT transmission service reservations and revenue neutrality in Markets+ provides a stable and predictable framework for transmission cost management. This approach encourages long-term investment in transmission infrastructure and reduces financial risks for participants by ensuring that congestion rents are allocated based on prevailing flows.
EDAM: EDAM’s allocation of congestion and transfer revenues to the entities responsible for managing constraints promotes efficient grid operation and equitable cost recovery. By sharing transfer revenues between BAAs, EDAM encourages collaboration and proactive management of transmission constraints, balancing financial risks and rewards for participants.
Navigating congestion rent mechanisms
Understanding the congestion rent mechanisms in Markets+ and EDAM is essential for market participants aiming to navigate the complexities of the energy industry. While Markets+ focuses on revenue neutrality and long-term transmission service, EDAM emphasizes efficient grid operation and equitable revenue allocation. By comprehending these mechanisms, participants can make informed decisions that enhance market efficiency and manage financial risks effectively.
In summary, both Markets+ and EDAM offer unique approaches to handling congestion rent, each with its own set of benefits and challenges. By understanding these mechanisms, market participants can better navigate the complexities of the energy industry and contribute to a more efficient and reliable electricity market.
Learn more about EDAM in our blog post, “How Will the CAISO Extended Day Ahead Market Work?”
