The cost of fairness in electricity markets

Daniel Linnenbrink

No 26-040, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: European policymakers argue that bidding zones with uniform prices ensure fairness in electricity markets. Since the outcome of such a fair spot market is often infeasible due to network constraints, a second stage is needed: the redispatch. I establish a mechanism design result showing that even a minimal fairness restriction on the first stage strictly increases procurement costs for asymmetric dispatches. In detail, I analyze a market-based redispatch mechanism where inc-dec gaming creates arbitrage profits for those producers that benefit the network the least. These results identify a general cost of fairness in sequential markets and question uniform bidding zones in electricity markets.

Keywords: mechanism design; fairness; electricity market design (search for similar items in EconPapers)
JEL-codes: D47 D82 L94 Q48 (search for similar items in EconPapers)
Date: 2026
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