Managing Interlocational Price Risk

Intertemporal price volatility is not the only form of risk faced by electricity market participants. In addition, traders who trade hedge contracts across differently priced locations also face interlocation price risk. Chapter 14 discusses tools and processes for hedging interlocational price risk. The chapter starts by demonstrating the importance of the merchandising surplus for hedging interlocational price risk. CapFTRs are then introduced as a tool for hedging locational price risk. It is shown how traders can use CapFTRs to construct a portfolio to hedge the risks they face. Conventional fixed-volume financial transmission rights (FTRs) are introduced and their drawbacks as a hedging instrument discussed. The chapter concludes by exploring the role of transmission right prices as a signal for investment in the network.