Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/339509 
Authors: 
Year of Publication: 
2026
Series/Report no.: 
OIES Paper: EL No. 61
Publisher: 
The Oxford Institute for Energy Studies, Oxford
Abstract: 
Since the deregulation of electricity markets in the 1990s, U.S. power grids have witnessed the creation of an increasingly diverse suite of financial instruments designed to mitigate risks caused by underlying generation and consumption patterns. However, the nature of risks is shifting rapidly as power grids absorb unprecedented changes in both demand and supply: on the demand side, the recent emergence of large AI data centers and increased electrification across heating, transport, and industrial applications have shifted demand patterns, increasing the risk of resource adequacy; on the supply side, the expansion of utility-scale renewables and storage and the retirement of coal-fired power plants have introduced variability and uncertainty, raising concerns around baseload reliability. Under these paradigms, new grid risks surface that challenge the adequacy of financial instruments designed for a power system dominated by predictable load growth and dispatchable thermal generation, thereby exposing market participants and system operators to operational challenges and unhedged risks. This paper analyzes changes to five main categories of grid risk for market participants - 1) locational congestion risk, 2) temporal price risk, 3) volume variability risk, 4) demand and supply-side tail risks, and 5) regulatory design risk - under the new demand and supply-side dynamics and assesses the effectiveness of a main financial hedging instrument, the Financial Transmission Right (FTR), in mitigating these risks for market participants. This paper specifically analyzes the impact of the increasing penetration of utility-scale energy storage assets on the payoff of FTRs as an example to illustrate potential risks to the grid that arise from inter-temporal dispatch decisions. Based on the theoretical discussion, this paper proposes the design of Multi-Period, Volume-Adjustable (MPVA) FTRs to address the inter-temporal changes in the modern grid. The discussion clarifies the boundary between risks that can be financialized and those that require physical or operational solutions as well as trade-off considerations in financial hedging instrument design, thus offering a potential roadmap for the next generation of electricity market design.
Subjects: 
electricity market design
energy storage
Financial transmission rights (FTR)
Nodal electricity market
risk hedging
tail risk
ISBN: 
978-1-78467-288-1
Document Type: 
Working Paper

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