Identifying a balancing point for electricity transmission contracts

Electricity transmission contracts allocate scarce resources, allow hedging against locational price differences, and provide information to guide investment. However, ownership of transmission contracts might enhance market power of strategic generators. If the allocation mechanism for transmission contracts does not prevent generators from obtaining market power-enhancing contracts, explicit restrictions on owning transmission contracts might be required. To ensure that these restrictions do not interfere with the need to hedge for transmission price risk, one proposal is to define all transmission contracts to a balancing point at which energy is traded. Generators are only allowed to own transmission contracts toward this balancing point. Traders or load hedge the price risk from this balancing point to the location of load with transmission contracts. We propose an algorithm and apply it to the European electricity network to identify a balancing point that reduces market power of generation companies and is well connected. Market-level data or detailed information about demand are not required. The only critical input is assumptions on future transmission constraint patterns.