Why Do We Need FTRs?
Challenge:
- LMP exposes PJM Market Participants to price uncertainty for congestion cost charges
- During constrained conditions, PJM Market collects more from loads than it pays generators
Solution:
- Provides ability to have price certainty
- FTRs provide hedging mechanism that can be traded separately from transmission service
Notes:
- Locational Marginal Pricing (or LMP) exposes PJM Market Participants to potentially high or volatile congestion charges. Remember, congestion charges occur when the transmission system is congested and out-of-merit resources must be used to meet PJM demand.
- During constrained operations, the PJM Market collects more from loads than it pays to generators. We need a fair method of allocating the excess funds we collect.
- So we need a solution to the challenge which protects PJM Market Participants from the congestion price uncertainty and provides a fair method of allocating the leftover funds.
- Fixed Transmission Rights or FTRs are PJM’s solution to the challenges listed on the slide.
- FTRs provide Market Participants with a hedging mechanism. For those of you not familiar with what a hedging mechanism is, a hedging mechanism is a method of mitigating possible loss, or in this case congestion charges, by counterbalancing the loss. In other words, FTRs allow Market Participants to purchase protection from congestion charges.