An analysis of zonal electricity pricing from a long-term perspective

Quentin Lété, Yves Smeers and Anthony Papavasiliou
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Quentin Lété: Université catholique de Louvain, LIDAM/CORE, Belgium
Yves Smeers: Université catholique de Louvain, LIDAM/CORE, Belgium
Anthony Papavasiliou: Université catholique de Louvain, LIDAM/CORE, Belgium

No 3201, LIDAM Reprints CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In an era of energy transition, it is crucial to ensure that the design of the short-term electricity market provides sufficient cash flows to producers so as to allow the investment of the right technology at the right location. In this paper, we revisit the question of capacity allocation in zonal markets from a long-term perspective. We model the capacity expansion problem in zonal markets in which inter-zonal transmission capacity allocation is organized through flow-based market coupling, which is an approximation of power flow equations in aggregate networks that is employed in European market design. We demonstrate that the classical result of equivalence between centralized and decentralized formulations in transmission-constrained markets ceases to hold in this case. We propose a model of the decentralized capacity expansion problem with flow-based market coupling as a generalized Nash equilibrium that we formulate as a linear complementarity problem. We then perform simulations of the capacity expansion problem with nodal pricing and three variations of zonal pricing on a realistic instance of the Central Western European network and comment on the impacts of flow-based market coupling on investment.

Keywords: Zonal electricity markets; Transmission capacity allocation; Capacity expansion (search for similar items in EconPapers)
Pages: 16
Date: 2022-03-01
Note: In: Energy Economics, 2022, vol. 107, 105853
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvrp:3201

DOI: 10.1016/j.eneco.2022.105853

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