Merchant Transmission Expansion Based on Financial Transmission Rights

Long-term financial transmission rights (FTRs) could be used to create incentives for transmission investments. However, these new investments may cause negative externalities on pre-existing FTRs. Therefore the system operator needs a protocol for awarding incremental FTRs for new transmission capacity that maximize investors´ preferences while simultaneously taking into account that the pre-existing network capacity may not be fully allocated by pre-existing FTRs. To preserve revenue adequacy, a minimum amount of currently unassigned FTRs (or proxy FTRs) that satisfies the power flow constraints in the pre-existing network is calculated by the system operator. The challenge is to define the proxy awards. Hogan proposes to define proxy awards as the best use of the current network along the same direction as the incremental FTR awards. This includes allowing positive or negative incremental FTR awards. In this paper we develop a bi-level programming model including a methodology for realizing Hogan´s proposal for allocation of long-term FTRs and apply it to a three-node network. Our results show that the simultaneous feasibility of the transmission investment depends on factors such as investor and preset proxy preferences, pre-existing FTRs, and transmission capacity in the expanded and pre-existing network.