Improving market participant strategies with FTR options

Strategies that reduce risk and maximize profit are of great interest to electricity market participants. Commodities and financial instruments that can be hedged to reduce uncertainty and manage risk are important components of such a strategy. One such vehicle is the fixed transmission right (FTR). The holder of an FTR is entitled to the transmission congestion rents collected between specified points of delivery and receipt. However, if congestion occurs in an unanticipated direction, the holder of an FTR is obligated to pay. An interesting compromise derivative is the FTR option (FTRO). The FTRO gives its holder the right to the congestion rents if they are positive, without the obligation to pay if they are negative. In this paper the authors provide examples of how FTR options can be utilized as part of a comprehensive market strategy. Profitability with and without the FTRO is determined under various market and network scenarios. Methods and assumptions required for valuing the options are examined, including equations similar to Black-Scholes