Two prices fix all? On the Robustness of a German Bidding Zone Split

Jonas Zinke

No 2023-7, EWI Working Papers from Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

Abstract: As redispatch costs and their associated distributional impacts continue to rise,the discussion on reconfiguring bidding zones in European power markets persists. However, determining an appropriate bidding zone configuration is a non-trivial task, as it must prove beneficial under varying weather conditions, load situations, and an uncertain future, essentially necessitating persistent benefits. This paper uses the German-Luxembourg market area as an example to investigate the impact of uncertain factors, such as short-term weather patterns and long-term system changes, on the potential reduction of redispatch costs resulting from a two-zone split. Employing hierarchical clustering on hourly time series of Locational Marginal Prices for multiple historical weather and future scenario years, the paper derives bidding zone splits and assesses their robustness regarding redispatch cost reduction. Sensitivities to uncertain factors such as grid and renewable expansion, demand development, and fuel prices are investigated. The results indicate that a north-south split of the German-Luxembourg market area can robustly reduce redispatch costs.The impact on the reduction potential of yearly weather fluctuations is limited, owing to the structural nature of grid bottlenecks. However, the long-term transformations within the powersystem,coupled with their associated uncertainties, can significantly diminish the potential forcost reduction through a bidding zonesplit.

Keywords: Market Design; Bidding Zone Review; Electricity Markets; Nodal Pricing; Energy System Modeling; Renewable Energies (search for similar items in EconPapers)
JEL-codes: C61 D47 Q40 Q48 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2023-12-05, Revised 2024-01-09
New Economics Papers: this item is included in nep-ene, nep-env, nep-eur and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ewikln:2023_007

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