Revenue adequacy procedure in congested networks through equivalent bilateral exchanges

Abstract

In this paper it is presented a new strategy designed with the purpose of achieving revenue adequacy in congested networks that use financial transmission rights - FTR markets. Normally, an independent system operator ISO is required to cover payments to FTR holders through congestion revenues. When this is not possible, there exists an unbalance or revenue inadequacy. Several approaches are used today to distribute or allocate this inadequacy like a pro-rata and future deficit compensation. Because of the disadvantages of these approaches, the method suggested in this paper is to apply the principle of equivalent bilateral exchanges - EBE to allocate transmission inadequacy costs. The advantage is the possibility of incorporating the concept of "pay as used" among agents. Several numerical tests show comparatively the presence of cross-subsidies produced by pro-rata approach and the advantages of using the suggested approach.