What does price cost capping achieve in transmission congestion scenarios?

In transmission congestion scenarios, price cost capping is a mechanism aimed at limiting the prices that affected resources can charge. When congestion occurs, the market can see price spikes due to the limited availability of transmission capacity. By implementing price cost capping, the market ensures that the prices for resources that are directly affected by congestion do not exceed a certain level.

This limitation is crucial because it helps to protect consumers from extreme price volatility while also providing sufficient incentives for alternative generation resources that are not limited by the same constraints. It maintains a balance where prices remain reflective of actual supply and demand conditions without leading to excessive costs due to congestion.

In contrast, resource allocation may not be reduced as a direct result of price capping; instead, the market dynamically responds to the capped prices. Price limits do not inherently increase grid frequency or improve market clearance times; they primarily focus on stabilizing prices for the resources that are impacted during a period of congestion, ensuring market stability and consumer protection.