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What are Financial Transmission Rights?

Financial Transmission Rights (FTRs) are also referred to as Transmission Congestion Contracts (TCC) and/or Congestion Revenue Rights (CRR).  Financial Transmission Rights replaces physical transmission rights in centralized electricity markets.

A Financial Transmission Right is a financial contract for collecting an amount of money which is determined by the difference between two nodal prices. To determine the amount of money, you must first determine the "direction" of the Financial Transmission Right from the point of view of the generating company that holds the FTR.  The payoff of the "sourcing" Financial Transmission Right is defined by the nodal price in the other market minus the nodal price at the generator. This is opposed to the opposite direction or the "sinking" direction of the FTR - which is the payoff of the sinking FTRs - which is defined by the nodal price at the generator minus price in the other market.

The Financial Transmission Rights is a point to point financial instrument used to hedge congestion. Financial Transmission Rights gives the holder the financial equivalent of physical network capacity. Ignoring losses, the effect of the Financial Transmission Rights is to guarantee its’ holder that, for a predetermined amount of energy, the holder’s price at the point of withdrawal will be the same as the price at the point of injection. The Financial Transmission Rights payoff is the difference in Transmission Congestion between points of injection (e.g., a remote generator) and withdrawal (e.g., a load center). Financial Transmission Rights are bought and sold in centralized electricity markets for periods ranging from a month to several years; the value of the FTR depends on expected transmission congestion.

Challenges to Forecasting Future Value of Financial Transmission Rights

Forecasting electric power demand for months in advance to several years in advance is a daunting task.  Forecasting transmission congestion for these same periods is even more daunting and challenging.  Therefore, forecasting the future value of Financial Transmission Rights requires the use of simulation software that models the electricity markets under a range of operating conditions, weather/climate conditions, load growth scenarios, planned outages, transmission expansion and generation expansion scenarios that effectively forecasts future expected value of the Financial Transmission Right.

Financial Transmission Rights Auctions

Auctions are conducted to sell Financial Transmission Rights (FTRs).  This assists market participants in hedging their price risk when delivering energy on the grid.

As previously discussed, Financial Transmission Rights are financial instruments that entitle the holder to a stream of revenues (or charges) based on the hourly congestion price differences across a transmission path in the Day-Ahead Energy Market.

Financial Transmission Rights provide a hedging mechanism that can be traded separately from transmission service. Market participants are able to hedge against their congestion costs by acquiring FTRs that are consistent with their energy deliveries.

Market participants can manage their FTR portfolios by using the eFTR tool. Participants use eFTR to post their FTRs for bilateral trading as well as to participate in the scheduled monthly, annual and long term FTR auctions.

Frequently Asked Questions About Financial Transmission Rights

What are Financial Transmission Rights? 

Financial Transmission Rights are financial instruments that are awarded to the highest bidder in Financial Transmission Rights Auctions.  The winning bidder entitles the holder to a stream of (future) revenues (or charges) based on the hourly day-ahead congestion price differences across the specific transmission path identified in the financial instrument.

NOTE:  Owning a Financial Transmission Right does NOT entitle the owner to any rights for physical delivery of electricity or power.

Why would a company need Financial Transmission Rights? 

Holding or owning Financial Transmission Rights protects the company (and the transmission company and its’ customers) from price increases of power due to Transmission Congestion when their energy deliveries are consistent with their firm reservations. Essentially, FTRs are financial instruments that entitle the holder to rebates of congestion charges paid by the ISO and Network Transmission Service Customers.

How are Financial Transmission Rights acquired? 

Financial Transmission Rights can be acquired in one of the following; the Long-Term FTR Auction, Annual FTR Auction, the Monthly FTR Auctions or the FTR Secondary market.

What is “Transmission Congestion” and when does it occur?

The term “Transmission Congestion” is somewhat of a misnomer. 

First of all, Transmission Congestion occurs when there is insufficient energy to meet the demands of the customers of the transmission company. Secondly, “Transmission Congestion” does not mean that the transmission system is slowing down or that the electricity has become blocked or delayed. It should be pointed out that operating a transmission system beyond its rated capacity can result in line faults or electrical fires. 

So, “Transmission Congestion” is actually a shortage of transmission capacity to supply the transmission company’s customers. When Transmission Congestion occurs, the transmission company is typically running at full capacity and proper efficiency, however, they are unable to serve all of its’ waiting customers.

When Transmission Congestion happens in a competitive (deregulated) market, there is a risk of “price gouging” from utilities that own or control electric power transmission. Regulatory bodies are aware of this risk, and most state’s Public Utility Commissions have built-in safeguards that protects against price-gouging or abusive pricing, and that congestion-related energy cost increases reasonably reflect the extra costs incurred in alleviating Transmission Congestion.  Typically, Transmission Congestion is corrected by;  “tuning the system” to increase its capacity or adding new transmission infrastructure, or decreasing end-user demand for electricity through “Demand Side Management” programs or “Automated Demand Response” programs. See www.DemandSideManagement.com or www.AutomaedDemandResponse.com for more information about Demand Side Management and Automated Demand Response.

How are Financial Transmission Rights “cleared” through the FTR Auctions? 

The clearing mechanism of the FTR Auctions maximizes the quote-based value of the set of FTRs awarded in each auction. The FTR Auctions will calculate clearing prices for all FTR obligations at all buses, regardless of whether they are bought or sold in the auction. The FTR Auctions will calculate the clearing prices for FTR options for all valid FTR Option paths, regardless of whether they are bought or sold in the auction. 

Can an ARR holder self-schedule an FTR Option in the Annual FTR Auction? 

No. Since ARRs are only allocated in the form of Obligations, the FTR that is self scheduled in the Annual FTR Auction must be an FTR Obligation. 

What are the requirements for bidding in the Financial Transmission Rights Auctions?

While the requirements may vary from state to state and ISO to ISO, generally, in order to submit a bid to purchase Financial Transmission Rights, you must be a member or a Transmission Service Customer. To submit an offer to sell Financial Transmission Rights, you must own the Financial Transmission Rights.  You can sell any portion of the Financial Transmission Right.

If I sell an FTR, what happens with my transmission reservation and my congestion costs?

If you sell a Financial Transmission Right, you still have the right to deliver the energy, and your curtailment priority does not change.

If you sell a Financial Transmission Right, you will pay any congestion charges incurred in the delivery of energy to your sink. Actually everyone pays congestion, only FTR owners get it back in the form of congestion credits. 

Does a Financial Transmission Rights to a hub or a zone hedge you against congestion for delivery to any bus in that aggregate?

No. Financial Transmission Rights will only protect you against delivery to that aggregate. 

Even though we are auctioning off a percentage of the capability for each round of the Annual Financial Transmission Rights Auction, can a participant bid 100% of their requested MW?

 Yes. A participant can submit a bid for any positive MW amount. 

Can there be a negative strike (bid) price for a Financial Transmission Right bid?

If the Financial Transmission Right bid is for an FTR Obligation bid, the strike (bid) price can be negative. If the FTR bid is for an FTR Option, then the strike (bid) price cannot be negative. 

How are Financial Transmission Right Options cleared in the auction in conjunction with FTR Obligations?

The FTR Auctions maximize the quote-based bid value of a set of simultaneous feasible FTRs awarded in the auction. To ensure feasibility, counterflow created by an FTR Option bid must be ignored when FTRs bids are tested for feasibility. Since you cannot pay for something that has no downside, the clearing prices of an FTR Option Buy Bid will never be less than zero. The clearing price of an FTR Option will always be greater than the clearing price of an FTR Obligation for the same path. 

Is there a limit to the number of FTR Obligations and FTR Options in the FTR Auctions? What are the valid sources and sinks?

In the Long Term and Annual Financial Transmission Right Auctions, valid sources and sinks for Financial Transmission Right Obligations are limited to Hubs, Zones, Aggregates, Interface Buses and Generator Buses.

In the Monthly Financial Transmission Right Auctions, valid sources and sinks include any single bus or combination of buses for which a Day-ahead LMP is calculated and posted including Hubs, Zones, Aggregate Buses, Generator Buses, and Load Buses.

In the Annual and Monthly Financial Transmission Right Auctions, the paths of Financial Transmission Right Options are limited to a subset of the entire transmission system. Option paths are not available in the Long Term FTR Auction. The number of FTR Obligations and FTR Options are only limited by the bids submitted by Participants. 

Under what circumstances can the sink LMP (load) be less than the source LMP (generator)?

Depending on the binding constraints that result, the LMP at a sink can be less than the LMP at the source.

Can Financial Transmission Right Options be traded on the FTR Secondary (Bilateral) Market?

Yes. Both FTR Options and FTR Obligations can be traded bilaterally in the FTR Secondary Market.

See our other websites for more information:

                                            www.AuctionRevenueRight.com                                www.AuctionRevenueRights.com

                                            www.AutomatedDemandResponse.com                    www.DemandSideManagement.com

                                            www.ElectricPowerTransmission.net                         www.ElectricPowerlines.com

                                            www.FinancialTransmissionRight.com                      www.HighVoltageDirectCurrent.com

                                            www.IntelligentLoadShedding.com                            www.LocationalMarginalPrice.com

                                            www.LocationalMarginalPricing.com                         www.NodalPrice.com

                                            www.NodalPricing.com                                                 www.LoadResponse.com

                                            www.PriceResponse.com                                               www.TimeOfUsePricing.com

                                            www.TransmissionAndDistribution.net                      www.TransmissionCongestionRight.com

                                            www.TransmissionCongestionRights.com                  www.UnifiedNationalSmartGrid.com

Useful electric formulas:

Real power (P) - unit: watt (W) 
Reactive power (Q) - unit: volt-amperes reactive (VAr) 
Complex power (S) - unit: volt-ampere (VA) 
Apparent Power (|S|) , that is, the absolute value of complex power S - unit: volt-ampere (VA) 

What is Energy Resource Planning?

The purpose of Energy Resource Planning (ERP)seeks to utilize and integrate the requisite analytical concepts and tools necessary to approach the problems of planning for an adequate energy supply and demand balance at the local, regional and national levels.  With a greater focus on reducing and eliminating greenhouse gas emissions, there is an increasing emphasis on "Carbon Free Energy" and "Pollution Free Power."  Renewable energy resources and renewable energy technologies are viewed as the preferred path forward for providing for energy supply and demand in conjunction with Demand Side Management.

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