Cutting Edge: Measuring the risk of Financial Transmission Rights

In this month’s article, Ning Zhang proposes a semi-parametric approach to calculate the risk of FTRs/TCCs portfolios whose risk is hard to capture by using standard VaR methods. The major specialties of FTRs/TCCs – such as non-normality and seasonality – are modelled reasonably by this method. A novel back-test procedure is also proposed to validate the method outlined

The transmission of electricity is vital for the development of the electricity industry. The emerging markets for Financial Transmission Rights (FTRs) or Transmission Congestion Contracts (TCCs) have attracted a lot of attention from generators, load-serving entities and pure speculators. They use the contracts to either hedge their congestion-cost risks or speculate within the transmission market. The literature on quantifying the risk of these relatively new financial products is very limited