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

Author

Listed:
  • Lété, Quentin

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

  • Smeers, Yves

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

  • Papavasiliou, Anthony

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

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.

Suggested Citation

  • Lété, Quentin & Smeers, Yves & Papavasiliou, Anthony, 2022. "An analysis of zonal electricity pricing from a long-term perspective," LIDAM Reprints CORE 3201, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:3201
    DOI: https://doi.org/10.1016/j.eneco.2022.105853
    Note: In: Energy Economics, 2022, vol. 107, 105853
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    Citations

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    Cited by:

    1. Mete Şeref Ahunbay & Martin Bichler & Johannes Knörr, 2023. "Challenges in Designing Electricity Spot Markets," NBER Chapters, in: New Directions in Market Design, National Bureau of Economic Research, Inc.
    2. Sirin, Selahattin Murat & Camadan, Ercument & Erten, Ibrahim Etem & Zhang, Alex Hongliang, 2023. "Market failure or politics? Understanding the motives behind regulatory actions to address surging electricity prices," Energy Policy, Elsevier, vol. 180(C).
    3. Daniela Pereira Macedo & António Cardoso Marques & Olivier Damette, 2023. "Challenges in Assessing the Behaviour of Nodal Electricity Prices in Insular Electricity Markets: The Case of New Zealand," Economies, MDPI, vol. 11(6), pages 1-19, June.
    4. Triolo, Ryan C. & Wolak, Frank A., 2022. "Quantifying the benefits of a nodal market design in the Texas electricity market," Energy Economics, Elsevier, vol. 112(C).

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