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The Effects of Transmission-Rights Pricing on Multi-Stage Electricity Markets

Erwann de Belloy de Saint-Lienard, Jakub Marecek, Vyacheslav Kungurtsev

TL;DR

This paper analyzes how cross-border transmission capacity pricing affects multi-stage electricity markets using two analytical models. It develops a two-stage Cournot framework with elastic demand and asymmetric costs, and a PTR-based model with primary and secondary markets, analyzed via backward induction and LCP/KKT methods. It shows that, even when day-ahead trading can lower prices and improve welfare, noncooperation can lead to prisoner's dilemmas, and identifies rights withholding in PTR markets as a key efficiency risk. The work also evaluates regulatory tools such as UIOSI/UIOLI and congestion-cost management (via $\eta$) to mitigate market power and improve cross-border integration, offering guidance for market design and policy in decentralized electricity grids.

Abstract

Cross-border transmission infrastructure is pivotal in balancing modern power systems, but requires fair allocation of cross-border transmission capacity, possibly via fair pricing thereof. This requirement can be implemented using multi-stage market mechanisms for Physical Transmission Rights (PTRs). We analyse the related dynamics, and show prisoner's dilemma arises. Understanding these dynamics enables the development of novel market-settlement mechanisms to enhance market efficiency and incentivize renewable energy use.

The Effects of Transmission-Rights Pricing on Multi-Stage Electricity Markets

TL;DR

This paper analyzes how cross-border transmission capacity pricing affects multi-stage electricity markets using two analytical models. It develops a two-stage Cournot framework with elastic demand and asymmetric costs, and a PTR-based model with primary and secondary markets, analyzed via backward induction and LCP/KKT methods. It shows that, even when day-ahead trading can lower prices and improve welfare, noncooperation can lead to prisoner's dilemmas, and identifies rights withholding in PTR markets as a key efficiency risk. The work also evaluates regulatory tools such as UIOSI/UIOLI and congestion-cost management (via ) to mitigate market power and improve cross-border integration, offering guidance for market design and policy in decentralized electricity grids.

Abstract

Cross-border transmission infrastructure is pivotal in balancing modern power systems, but requires fair allocation of cross-border transmission capacity, possibly via fair pricing thereof. This requirement can be implemented using multi-stage market mechanisms for Physical Transmission Rights (PTRs). We analyse the related dynamics, and show prisoner's dilemma arises. Understanding these dynamics enables the development of novel market-settlement mechanisms to enhance market efficiency and incentivize renewable energy use.
Paper Structure (19 sections, 8 theorems, 49 equations, 2 figures, 1 table)

This paper contains 19 sections, 8 theorems, 49 equations, 2 figures, 1 table.

Table of Contents

  1. Cournot competition in a two-stages market with asymmetric duopolies
  2. Introduction to the model
  3. Generation game
  4. Day-ahead market equilibrium
  5. Model 1: A two-stage model with two markets which are duopolies
  6. Description of the model
  7. Resolution of the model
  8. An analysis of the first model
  9. Model 2: Physical Transmission Rights (PTRs)
  10. Description
  11. Resolution of the model
  12. Possible regulatory policies to reduce market power and rights withholding
  13. Management of congestion costs by the choice of the value of congestion costs $\eta$
  14. Model Use-it or Sell-it (UIOSI) or Use-it or loose it (UIOLI)
  15. Conclusion and future work
  16. ...and 4 more sections

Key Result

Theorem 3

The arbitrageurs profit chosen to optimize social welfare $\beta_A$ is:

Figures (2)

  • Figure 1: A schematic illustration of two markets with a duopoly of two generators in each market.
  • Figure 2: Timeline of the second model

Theorems & Definitions (18)

  • proof
  • Remark 2
  • proof
  • Theorem 3: Optimal profit of arbitrageurs
  • proof
  • Lemma 5
  • proof
  • Lemma 6
  • proof
  • Theorem 7
  • ...and 8 more