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Market-Based Redispatch in Zonal Electricity Markets: The Preconditions for and Consequence of Inc-Dec Gaming

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  • Hirth, Lion
  • Schlecht, Ingmar
Abstract
In zonal electricity markets such as Europe’s, system operators rely on out-of-the-market measures to relieve network congestion within bidding zones. One such measure is “redispatching” power plants, i.e. increasing the output of a station downstream of the congestion while lowering production of an upstream plant. Traditionally, generators have often been legally obliged to participate in redispatch and were subsequently compensated for costs incurred. In recent years numerous proposals have been made to organize redispatch through voluntary markets, including one by the European Commission. In this paper, we introduce a simple graphical game-theoretical model of a locational redispatch market within a one-zone electricity market. We solve the model explicitly by determining optimal bidding strategies and the Nash equilibrium. We show that market parties anticipate the redispatch market and bid strategically in the zonal market – this is the so-called increase-decrease game. As a result, grid congestion is aggravated, producers extract windfall profits, financial markets are distorted, and perverse investment incentives emerge. Despite claims to the contrary, we show that such gaming is possible absent any market power, i.e. under perfect competition. At the root of the problem is an inconsistent setup of power markets: combining a zonal with a locational market yields undue arbitrage oppor-tunities that rational firms exploit. We conclude that such inconsistent market design should be avoided.

Suggested Citation

  • Hirth, Lion & Schlecht, Ingmar, 2020. "Market-Based Redispatch in Zonal Electricity Markets: The Preconditions for and Consequence of Inc-Dec Gaming," EconStor Preprints 194292, ZBW - Leibniz Information Centre for Economics, revised 2020.
    • Handle: RePEc:zbw:esprep:194292
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    References listed on IDEAS

    as
    1. Brunekreeft, Gert & Neuhoff, Karsten & Newbery, David, 2005. "Electricity transmission: An overview of the current debate," Utilities Policy, Elsevier, vol. 13(2), pages 73-93, June.
    2. Hirth, Lion & Glismann, Samuel, 2018. "Congestion Management: From Physics to Regulatory Instruments," EconStor Preprints 189641, ZBW - Leibniz Information Centre for Economics.
    3. repec:reg:rpubli:73 is not listed on IDEAS
    4. Jonas Egerer, 2016. "Open Source Electricity Model for Germany (ELMOD-DE)," Data Documentation 83, DIW Berlin, German Institute for Economic Research.
    5. Pär Holmberg and Ewa Lazarczyk, 2015. "Comparison of congestion management techniques: Nodal, zonal and discriminatory pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    6. Konstantinidis, Christos & Strbac, Goran, 2015. "Empirics of Intraday and Real-time Markets in Europe: Great Britain," EconStor Research Reports 111266, ZBW - Leibniz Information Centre for Economics.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

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    3. Anna Pechan & Christine Brandstätt & Gert Brunekreeft & Martin Palovic, "undated". "Risks and incentives for gaming in electricity redispatch markets," Bremen Energy Working Papers 0043, Bremen Energy Research.
    4. Bucksteeg, Michael & Voswinkel, Simon & Blumberg, Gerald, 2023. "Improving flow-based market coupling by integrating redispatch potential - Evidence from a large-scale model," EconStor Preprints 270878, ZBW - Leibniz Information Centre for Economics.
    5. Bucksteeg, Michael & Voswinkel, Simon & Blumberg, Gerald, 2024. "Improving flow-based market coupling by integrating redispatch potential―Evidence from a large-scale model," Energy Policy, Elsevier, vol. 188(C).
    6. Johannes Knorr & Martin Bichler & Teodora Dobos, 2024. "Zonal vs. Nodal Pricing: An Analysis of Different Pricing Rules in the German Day-Ahead Market," Papers 2403.09265, arXiv.org, revised Jun 2024.
    7. Martin Palovic, 2022. "Making market-based redispatch efficient: How to alter distribution effects without distorting the generation dispatch?," Bremen Energy Working Papers 0041, Bremen Energy Research.
    8. Sirin, Selahattin Murat & Uz, Dilek & Sevindik, Irem, 2022. "How do variable renewable energy technologies affect firm-level day-ahead output decisions: Evidence from the Turkish wholesale electricity market," Energy Economics, Elsevier, vol. 112(C).
    9. Eicke, Anselm & Schittekatte, Tim, 2022. "Fighting the wrong battle? A critical assessment of arguments against nodal electricity prices in the European debate," Energy Policy, Elsevier, vol. 170(C).
    10. Erik Heilmann & Nikolai Klempp & Heike Wetzel, 2020. "Market design of regional flexibility markets: A classification metric for flexibility products and its application to German prototypical flexibility markets," MAGKS Papers on Economics 202002, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
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    12. Schittekatte, Tim & Meeus, Leonardo, 2020. "Flexibility markets: Q&A with project pioneers," Utilities Policy, Elsevier, vol. 63(C).

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