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How many zones should an electricity market have? A cross-country perspective on bidding zone design

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  • Michael G Pollitt
  • Marta Moretto Terribile

Abstract

The configuration of bidding zones has become a central issue in the ongoing debate on electricity market design. This paper critically analyses the effectiveness and limitations of zonal pricing through a comparative analysis of Italy, Norway, Sweden and Australia-with zonal systems-and of Texas and California, which moved from zonal to nodal regimes. We analyze the institutional, technical and socio-economic factors that shape these divergent trajectories, highlighting how national authority in the European context and energy system characteristics influence market structure. In zonal markets, locational pricing applies on the supply side, while demand-side application varies. By examining zoning processes and price convergence, we identify both shared patterns and context-specific dynamics. While zonal pricing can enhance transparency and investment signals, its effectiveness depends on periodic bidding zones reviews. The findings support a flexible approach to bidding zone design, aligned with the objectives of decarbonization, market integration, and system reliability.
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Suggested Citation

  • Michael G Pollitt & Marta Moretto Terribile, 2025. "How many zones should an electricity market have? A cross-country perspective on bidding zone design," Working Papers EPRG2515, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg2515
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    References listed on IDEAS

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    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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