Pricing for Electric Power

We propose a priority-pricing scheme for zonal access to the electric power grid that is uniform across all buses in each zone. The Independent System Operator (ISO) charges bulk power traders a per unit ex-ante transmission access fee based on the expected option value of the generated power with respect to the random zonal spot prices. The zonal access fee depends on the injection zone and a self-selected strike price determining the scheduling priority of the transaction. Inter zonal transactions are charged (or credited) with an additional expost congestion fee that equals the zonal spot price difference. The unit access fee entitles a bulk power trader to either physical injection of one unit of energy or a compensation payment that equals to the di erence between the realized zonal spot price and the selected strike price. The ISO manages congestion so as to minimize net compensation payments and thus, curtailment probabilities corresponding to a particular strike price may vary by bus. We calculate the rational expectation equilibia for a three and four node system and demonstrate that the e ciency losses of the proposed second best scheme relative to the e cient dispatch solutions are modest.