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Abstract

After their theoretical development in the early 1990s, Financial Transmission Rights (FTRs) have been applied in restructured US electricity markets for about a decade now. Lately, FTRs have also been proposed as a potential feature of the emerging European electricity market. This paper reviews the crucial differences between FTRs and the currently implemented physical transmission rights (PTRs), and investigates the institutional and regulatory prerequisites for introducing FTRs in Europe. Also, the paper analyzes whether FTRs could be used as a means to replace existing transmission contracts (ETCs) in Europe. The paper concludes that the introduction of FTRs would imply a conceptual shift from the current self-scheduling and bilateral approach to cross-border trading in Europe, to a more central scheduling approach. The smoothest transition from PTRs to FTRs would be achieved by auctioning PTRs with a use-it-or-sell-it property and gradually phasing out their physical usage. As a prerequisite, the introduction of cross-border FTRs requires the integration of national markets through power exchanges. The resulting quasi-monopoly position of the power exchanges with respect to cross-border trading would require a tighter relationship between power exchanges and transmission system operators (TSOs) and a new regulatory approach to power exchanges, e.g., regulated fees. An introduction of regionally applied FTRs would also require a closer cooperation between national TSOs, especially with regard to the determination of a simultaneously feasible set of FTRs and a more detailed grid model reflecting the actual congestion situation. The paper argues that FTRs have not been subject to financial regulation in the past, as both their volume and their value are determined purely by the physical dispatch and network situation. Hence, any manipulation of FTRs would occur by manipulating the physical market, which is covered by energy regulation. Regarding ETCs, it is shown that FTRs can only cover their congestion cost aspect, while other ETC provisions related to transmission and energy supply can’t be accounted for by FTRs. As there are no historical entitlements to offsetting crossborder congestion cost in Europe (in the absence of ETCs), FTRs would not be allocated to load scheduling entities for free, but would be auctioned off with the auction proceeds being allocated to transmission owners or transmission investors, e.g. via Auction Revenue Rights (ARRs). Finally, further research is needed to determine the extent to which financial instruments such as futures are able to replace or complement FTRs for hedging cross-border congestion risk.

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