Analyzing the temporal effects of Ex ante mechanism designs in power markets

This paper discusses the question of market efficiency in ex ante auctions for transmission capacity aimed at facilitating trading between connected, but distinct wholesale power markets. It is argued that the conventional simple no-arbitrage presumption as an efficiency criterion is not appropriate. The forward auction for capacity is a derivative on the related energy markets, essentially a two-way spread option on the spot prices. This is demonstrated though an example from the German and Dutch interconnector trading.