Assessment of transmission congestion price risk and hedging in the Brazilian electricity market

Abstract

The objective of this paper is to provide a methodology for pricing, under a generation company (Genco) point of view, long-term energy contracts signed across different price zones in a zonal pricing hydro-based power system where classical financial transmission rights (FTRs) are not available. The main result is the establishment of the overprice that a Genco must include in the contract signed in a neighbor zone (where the Genco faces the congestion risk) when compared to the same contract offered in its own zone (with no congestion risk). All relevant risks (hydrological risk, congestion risk, etc) are captured for the long-term through the use of scenarios. Based on these scenarios and on the risk profile of the agent modeled by utility functions (UFs), the pricing of cross-zones contracts are determined. The approach is illustrated with practical examples deriving from the Brazilian electricity market, which is hydro-based, has a zonal-pricing scheme and does not offer instruments to hedge against congestion risks, such as FTRs