Ms Celine McInerney, University College Cork
In electricity markets, interconnectors can be viewed as spread options on the spot prices of electricity between connected markets. Despite persistent price differentials between the Irish and British electricity markets, explicit transmission capacity auctions are undersubscribed and transmission rights acquired in auctions are not fully utilised. The aim of the work is to understand what specific factors are reducing market efficiency for transmission rights between Ireland and Britain. The valuation of transmission rights is significant for a number of reasons: (1) Efficient pricing of interconnector transmission capacity is critical for effective market coupling to achieve a single market for electricity. (2) Valuation of transmission rights is an important signal for new investment in interconnectors (3) adequate investment in interconnector transmission capacity is required to prevent wind curtailment.
The valuation of transmission rights between the UK and European electricity markets assumes increased importance as the UK will become a net energy importer in coming years and as the level of intermittent renewable generation increases.
The valuation of interconnector transmission rights raises both theoretical and policy questions. Empirical data for three years of power trading across the Moyle Interconnector between Ireland and Britain is analysed to test if interconnector access prices exhibit arbitrage or option-like characteristics. There is significant support for the hypothesis that auction prices for transmission rights are undervalued vis-à-vis both these valuation approaches. We also find significant power flows against the efficient price spread direction.
A survey of a group of experts with an interest in trading power between Ireland and Britain inform a number of possible explanations for the apparent inefficiency. These include market misalignment due to micro-structure issues, eg gate closure, contract size etc; lack of liquidity in the market for transmission rights; risk in transmission rights trading; intermittent wind and strategic behaviour by dominant firms. Asymmetric transmission costs as well as capacity payments based on flows rather than availability causes a larger ‘deadband’ in transaction costs than is usual with interconnection trading.