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Production Efficiency of Nodal and Zonal Pricing in Imperfectly Competitive Electricity Markets

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  • Sarfati, Mahir

    (Royal Institute of Technology (KTH))

  • Hesamzadeh, Mohammed Reza

    (Royal Institute of Technology (KTH))

  • Holmberg, Pär

    (Research Institute of Industrial Economics (IFN))

Abstract

Electricity markets employ different congestion management methods to handle the limited transmission capacity of the power system. This paper compares production efficiency and other aspects of nodal and zonal pricing. We consider two types of zonal pricing: zonal pricing with Available Transmission Capacity (ATC) and zonal pricing with Flow-Based Market Coupling (FBMC). We develop a mathematical model to study the imperfect competition under zonal pricing with FBMC. Zonal pricing with FBMC is employed in two stages, a day-ahead market stage and a re-dispatch stage. We show that the optimality conditions and market clearing conditions can be reformulated as a mixed integer linear program (MILP), which is straightforward to implement. Zonal pricing with ATC and nodal pricing is used as our benchmarks. The imperfect competition under zonal pricing with ATC and nodal pricing are also formulated as MILP models. All MILP models are demonstrated on 6-node and the modified IEEE 24-node systems. Our numerical results show that the zonal pricing with ATC results in large production inefficiencies due to the inc-dec game. Improving the representation of the transmission network as in the zonal pricing with FBMC mitigates the inc-dec game.

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  • Sarfati, Mahir & Hesamzadeh, Mohammed Reza & Holmberg, Pär, 2019. "Production Efficiency of Nodal and Zonal Pricing in Imperfectly Competitive Electricity Markets," Working Paper Series 1264, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:1264
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    2. Höckner, Jonas & Voswinkel, Simon & Weber, Christoph, 2020. "Market distortions in flexibility markets caused by renewable subsidies – The case for side payments," Energy Policy, Elsevier, vol. 137(C).
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    4. 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.
    5. 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.
    6. Marco Baudino & Jackie Krafft & Francesco Quatraro, 2024. "Exploring the direct rebound effects for residential electricity demand in urban environments: evidence from Nice," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 72(3), pages 757-795, March.
    7. Ali Darudi & Hannes Weigt, 2024. "Review and Assessment of Decarbonized Future Electricity Markets," Energies, MDPI, vol. 17(18), pages 1-38, September.
    8. Osińska, Magdalena & Kyzym, Mykola & Khaustova, Victoriia & Ilyash, Olha & Salashenko, Tetiana, 2022. "Does the Ukrainian electricity market correspond to the european model?," Utilities Policy, Elsevier, vol. 79(C).
    9. Piotr F. Borowski, 2020. "Zonal and Nodal Models of Energy Market in European Union," Energies, MDPI, vol. 13(16), pages 1-21, August.
    10. Jahns, Christopher & Stein, Tobias & Höckner, Jonas & Weber, Christoph, 2023. "Prevention of strategic behaviour in local flexibility markets using market monitoring – Concept, application example and limitations," Energy Policy, Elsevier, vol. 174(C).
    11. Zhou, Wei & Gu, Ruitao & Lu, Shuai, 2020. "Penetrating the real performance of SSE STAR enterprises: A double-market investigation," Finance Research Letters, Elsevier, vol. 37(C).
    12. Samar Fatima & Verner Püvi & Ammar Arshad & Mahdi Pourakbari-Kasmaei & Matti Lehtonen, 2021. "Comparison of Economical and Technical Photovoltaic Hosting Capacity Limits in Distribution Networks," Energies, MDPI, vol. 14(9), pages 1-23, April.
    13. Jun Dong & Dongran Liu & Xihao Dou & Bo Li & Shiyao Lv & Yuzheng Jiang & Tongtao Ma, 2021. "Key Issues and Technical Applications in the Study of Power Markets as the System Adapts to the New Power System in China," Sustainability, MDPI, vol. 13(23), pages 1-29, December.
    14. Loiacono, Luisa & Rizzo, Leonzio & Stagnaro, Carlo, 2025. "Impact of bidding zone re-configurations on electricity prices: Evidence from Sweden," Energy Economics, Elsevier, vol. 141(C).
    15. M. Y. Jumba & Y. S. Haruna & U. O. Aliyu & A. L. Amao, 2024. "Application of Games Theory in Modelling of Nigerian Electricity Market," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 11(5), pages 1129-1140, May.
    16. Attar, Mehdi & Repo, Sami & Mann, Pierre, 2022. "Congestion management market design- Approach for the Nordics and Central Europe," Applied Energy, Elsevier, vol. 313(C).

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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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