🤖 AI Summary
This study addresses the persistent underpricing of Long-Term Transmission Rights (LTTRs) in Europe relative to forward market prices, suggesting constrained arbitrage and the presence of implicit rents. Combining option pricing theory with panel regression models, the paper empirically examines how LTTR holders lock in arbitrage profits by shorting forward contracts in import markets and going long in export markets, using EEX futures data from 2018 to 2025. The analysis reveals, for the first time, that the LTTR mechanism systematically generates rents, resulting in an implicit transfer from electricity consumers to rights holders. Furthermore, it documents significant shifts in German power forward prices following LTTR auctions, highlighting inefficiencies in the current regulatory design.
📝 Abstract
Long-term transmission rights (LTTRs) are designed to support hedging in interconnected European electricity markets. LTTR auction prices have historically fallen short of forward market prices, signaling limited arbitrage. This paper studies the interaction of transmission rights and forward markets. Option pricing theory predicts that LTTR holders take short forward positions in importing markets and long forward positions in exporting markets to lock in arbitrage profits. Empirically, I find a corresponding price effect in the German electricity forward market immediately after LTTR auctions, using panel regression on EEX futures contracts traded between 2018 and 2025. This shows that LTTR holders can achieve systematic rents, indicating an inefficient regulatory intervention and a transfer from consumers to LTTR holders.