Insights into Congestion Costs and Financial Risk Management: The Electricity Market

“Congestion costs” occur in the electricity market when the power flows, equivalent to a projection mapping of energy injection and withdrawal, established by the “electricity stock exchange” and by “bi-lateral contracts”, are incompatible with the transfer capacity guaranteed by the power grid, in required security conditions. Transfer restrictions in the national and transboundary transmission grid can potentially determine the market segmentation in different geographical areas, preventing the producers to compete freely to satisfy the overall demand in those areas. As a result of power congestions, those producers that have reduced limitations in the power transfer are obviously favored, also if in the presence of high marginal production costs and prices, leading to the constitution of pools of producers that de facto control the local market. In particular this paper aims at describing and discussing the problem of power congestions, electricity price formation and congestion risk management