Stochastic simulation approach for valuation of congestion revenue rights

Congestion revenue right (CRR) is a financial tool designed to manage congestion risk in electricity markets. In this paper, a new method for valuation of CRR -stochastic simulation of transmission shadow prices- is introduced. First, operational and functional aspects associated with electricity markets are presented. The concept of CRR and its importance as a tool for managing congestion risk is presented. Second, a stochastic simulation model for valuation of CRR is developed. The applicability of it to different system conditions is analyzed. The performance of the methodology is tested in numerical examples. Third, details of the underlying random numbers generator are discussed. The possibility of using different measures for co-dependence is explored. The estimation of transmission shadow prices using different stochastic processes, in particular extreme value theory and regime switching process are mentioned. Finally, conclusions of the paper are presented.