Designing transmission rights to facilitate hedging

In a liberalised wholesale electricity market risk-averse market participants need some form of financial instrument to offset the risks of spot price variation across locations and across time. Some liberalised wholesale electricity markets seek to facilitate transactions across separately-priced nodes by making available an instrument known as a Financial Transmission Right (or FTR). But FTRs are flawed as a hedging instrument. They do not necessarily make available the full set of funds required to allow market participants to hedge locational price differences. Furthermore, conventional FTRs, which are associated with a volume which is fixed in advance, are not useful for hedging transactions where the volume depends on market conditions at the time. This paper proposes introducing a new form of transmission right which mimics the operation of a `cap' hedge contract. This transmission right can be combined into a portfolio which provides the natural backing for the price-dependent volume-varying hedge that most market participants require. We consider that this new design of transmission rights offers promise as an approach for facilitating hedging and improving market outcomes in wholesale electricity markets.