Two Price Zones for the German Electricity Market: Market Implications and Distributional Effects

We discuss the implications of two price zones (i.e., one northern and one southern bidding area) on the German electricity market. In the northern zone, continuous increases in capacity with low variable costs cause large regional supply surpluses in the market dispatch, while in the southern zone conventional capacity decreases. As the spatial imbalance of supply and load is increasing, the current single bidding area more often results in technically infeasible market results, requiring curative congestion management measures. There is an ongoing discussion about the potential effects of introducing bidding zones in Germany. This paper applies an electricity sector model with network representation to analyze the system implications and the distributional effects of two bidding zones in the German electricity system in 2012 and 2015. Results show a modest decrease in cross-zonal re-dispatch levels, particularly in 2015. However, overall network congestion and re-dispatch levels increase in 2015 and also remain on a high level for two bidding zones. Results are very sensitive to more than two bidding zones and additional line investments, illustrating the challenge to define stable price zones in a dynamic setting. With two bidding areas, prices in the model results increase in the southern zone and decrease in the northern zone. The average price deviation grows from 0.4EUR/MWh in 2012 to 1.7EUR/MWh in 2015, with absolute values being significantly higher in hours when price differences occur. Stakeholders within zones are exposed to the price deviations to a different extent. Distributional effects are surprisingly small compared to the wholesale price or different network charges.