Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/338917 
Year of Publication: 
2026
Series/Report no.: 
DIW Discussion Papers No. 2156
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
Locational marginal pricing (LMP) provides efficient locational dispatch and investment signals but requires a complementary congestion hedging instrument to function effectively. This paper investigates how exposure to locational price differences is managed in North American nodal electricity markets through the implementation of Financial Transmission Rights (FTRs). Drawing on insights from 15 industry experts directly involved across all major North American electricity markets, we consolidate first-hand perspectives that reveal the practical complexities of FTR design and implementation. While most interviewees view FTRs positively, their experiences uncover multiple nuanced challenges to successfully design locational hedging instruments, which are often overlooked in the academic literature. As FTR design depends on market characteristics, we apply the findings to the European electricity market and discuss implications for a possible implementation of LMP in Europe.
Subjects: 
financial transmission rights
locational marginal pricing
nodal pricing
risk hedging
congestion revenue
electricity market design
contracts for differences
JEL: 
D44
D47
L94
Q40
Document Type: 
Working Paper

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