Mitigating market power in financial transmission-right allocations

A methodology is proposed for taking into account potential market power in financial transmission-right (FTR) allocations. Hedging position ratios (HPRs) are computed for every FTR bid. These ratios quantify the relationship between the positions of a FTR bidder in the energy market, and in the transmission rights allocation (based on the transmission rights bids). These ratios are used to identify the potential market power from the transmission rights bidders and, therefore, used to prioritize critical positions in the auction. The transmission-right auction is modelled as a quadratic programming problem and solved by a primal-dual interior-point method. The methodology is illustrated by a three-node network, and then generalized in a five-node network.