How Many Zones Should an Electricity Market Have? A Cross-Country Perspective on Bidding Zone Design

Michael Pollitt and Marta Moretto Terribile

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The configuration of bidding zones has become a central issue in the ongoing debate on electricity market design. This paper critically analyzes the effectiveness and limitations of zonal pricing through a comparative analysis of Italy, Norway, and Sweden—three countries with mature zonal systems—and markets such as Texas and California, which initially adopted zonal pricing but later transitioned to nodal regimes. We investigate the institutional, technical and socio-economic factors shaping these divergent trajectories, highlighting how national governance structures and energy system characteristics influence market performance. In zonal market architectures, locational pricing is systematically applied on the supply side, while on the demand side, zonal pricing is optional and depends on the specific market design. By examining zone definition processes, price convergence, redispatch volumes and market liquidity, we identify both the commonalities and context-specific dynamics that underpin zonal market outcomes. While zonal pricing can enhance locational transparency and sup- port efficient investment, its long-term effectiveness relies on regular, data-driven revisions of zone boundaries that reflect evolving grid conditions. Although often conceptualized as an intermediate step toward nodal pricing, zonal pricing in practice tends to exhibit considerable inertia. The evolution of zones is typically gradual, with reconfigurations occurring infrequently and sometimes even resulting in a reduction in the number of zones. The findings support a flexible and adaptive approach to bidding zone design, guided by empirical evidence and aligned with the broader objectives of decarbonization, market integration, and system reliability.

Keywords: Zonal Pricing; Electricity Markets; Congestion Management; Bidding Zones (search for similar items in EconPapers)
JEL-codes: L94 (search for similar items in EconPapers)
Date: 2025-06-28
New Economics Papers: this item is included in nep-des
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Working Paper: How many zones should an electricity market have? A cross-country perspective on bidding zone design (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2541

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