The Economics of Electricity Markets

The Economics of Electricity Markets

Theory and Policy

The Loyola de Palacio Series on European Energy Policy

Edited by Pippo Ranci and Guido Cervigni

The Economics of Electricity Markets provides a cutting-edge analysis of the critical issues involved in the design and operation of electricity markets, as well as an assessment of alternative institutional arrangements that have either been implemented or are under discussion in Europe and the US.

Chapter 4: Congestion management and transmission rights

Dmitri Perekhodtsev and Guido Cervigni

Subjects: economics and finance, energy economics, industrial economics


In this chapter we discuss the impact of electricity transmission technology on the design and outcome of electricity markets. Electricity is transported on a transmission network from the place where it is generated to the place where it is used. Transmission congestion occurs when generation and demand schedules cleared in the market lead to a set of power flows violating one or more network constraints. When this happens, congestion must be alleviated. Electricity transmission is different from other goods and commodities for which transport flows can be re-routed relatively easily. On the contrary, increasing (net) injections at some locations and decreasing them at others is the primary and often only option to relieve congestion. Market arrangements differ across electricity markets in the way they induce market participants to deviate from the injection/withdrawal levels they would implement in the absence of any transmission constraints. Two general approaches can be identified.

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