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Open AccessArticle

Application of IRT Models to Selection of Bidding Paths in Financial Transmission Rights Auction: U.S. New England

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Department of Industrial, Manufacturing, and Systems Engineering, Texas Tech University, Lubbock, TX 79409, USA
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Department of Educational Psychology and Leadership, Texas Tech University, Lubbock, TX 79409, USA
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Author to whom correspondence should be addressed.
Energies 2020, 13(13), 3325; https://doi.org/10.3390/en13133325
Received: 2 June 2020 / Revised: 23 June 2020 / Accepted: 26 June 2020 / Published: 30 June 2020
(This article belongs to the Special Issue Energy Economics and Policy in Developed Countries)
This paper explores a way to apply Item Response Theory (IRT), one of the popular statistical methodologies in measurement and psychometrics, to evaluate Financial Transmission Rights (FTR) paths in the U.S. electricity market. FTR is an energy derivative product to hedge congestion cost risks inherent in constrained transmission lines. In New England, with about 1200 pricing locations, the theoretical combinations of FTR paths amount to 1.4 million in prevailing flows alone. With capital constraints, it is imperative that FTR market participants build the capability to evaluate FTR paths to bid on. IRT provides a framework of how well tests work, and how individual items work on tests, estimating respondents’ latent abilities, and individual item parameters. IRT is utilized to analyze historical electricity data of 2019 for a daily congestion cost of eight customer load zones and one hub in the U.S., New England, for the evaluation of FTR paths. In the analysis, an item represents an FTR path, while item difficulty, item discrimination, and a latent trait variable for the path correspond to the path profitability, risk level, and daily congestion ability, respectively. This paper explores the experimental procedures by which IRT, a psychometric tool, may also be applicable in complex energy markets, providing a consistent and standardized analytical framework to address the issues of selection and prioritization among multiple opportunities. FTR path evaluation is conducted in three steps to determine bid priority paths in FTR auctions: parameter significance tests, ranking on path profitability and risk level, and weighting scores of individual rankings on the two criteria. View Full-Text
Keywords: energy economics; financial transmission rights (FTR); FTR auction; FTR path evaluation; electric market; item response theory (IRT); psychometrics energy economics; financial transmission rights (FTR); FTR auction; FTR path evaluation; electric market; item response theory (IRT); psychometrics
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Jang, P.Y.; Jung, K.; Beruvides, M.G. Application of IRT Models to Selection of Bidding Paths in Financial Transmission Rights Auction: U.S. New England. Energies 2020, 13, 3325.

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