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The relevance of grid expansion under zonal markets

Author

Listed:
  • Bertsch, Joachim

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

  • Brown, Tom

    (Frankfurt Institute of Advanced Studies)

  • Hagspiel, Simeon

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

  • Just, Lisa

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

Abstract
The European electricity market design is based on zonal markets with uniform prices. Locational price signals within these zones – necessary to ensure long-term efficiency – are not provided. Specifically, if intra-zonal congestion occurs due to missing grid expansion, the market design is revealed as inherently incomplete. This might lead to severe, unwanted distortions of the electricity market, both in the short- and in the long-term. In this paper, we study these distortions with a specific focus on the impact of restricted grid expansion under zonal markets. For this, we use a long term fundamental dispatch and investment model of the European electricity system and gradually restrict the allowed expansion of the transmission grid per decade. We find that the combination of an incomplete market design and restricted grid expansion leads to a misallocation of generation capacities and the inability to transport electricity to where it is needed. Consequences are severe and lead to load curtailment of up to 2-3 %. Moreover, missing grid expansion makes it difficult and costly to reach envisaged energy targets in the power sector. Hence, we argue that in the likely event of restricted grid expansion, either administrative measures or – presumably more efficient – an adaptation of the current market design to include locational signals will become necessary.

Suggested Citation

  • Bertsch, Joachim & Brown, Tom & Hagspiel, Simeon & Just, Lisa, 2016. "The relevance of grid expansion under zonal markets," EWI Working Papers 2015-7, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    • Handle: RePEc:ris:ewikln:2015_007
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    electricity market; grid expansion; incomplete market design; misallocation; load curtailment;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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