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Is an inefficient transmission market better than none at all? On zonal and nodal pricing in electricity systems

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  • Joachim Bertsch

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

Abstract

In this paper, the trade-off between inefficient transmission forward markets (in nodal pricing regimes) and the inefficiency induced by hiding transmission constraints from the market (in zonal pricing regimes) is analyzed. First, a simple two node model formalizing the general trade-off is deveoped. Then, comparative statics are performed with a stochastic equilibrium model including more nodes, loop flows and an energy and transmission forward market. Inefficiency in the transmission forward market is introduced via a bid-ask-spread and risk aversion of market participants. The welfare impacts for a broad range of supply, demand, grid and inefficiency parameters are analyzed numerically. For efficient spot and forward markets, the results of the literature of nodal pricing being the efficient benchmark are confirmed. With inefficient transmission forward markets, however, zonal pricing proves advantageous in situations with little congestion and low costs. The results imply that the trade-off between the pricing regimes should be considered carefully when defining the geographical scope of bidding zones.

Suggested Citation

  • Joachim Bertsch, 2015. "Is an inefficient transmission market better than none at all? On zonal and nodal pricing in electricity systems," EWI Working Papers 2015-5, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    • Handle: RePEc:ris:ewikln:2015_005
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    References listed on IDEAS

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    Cited by:

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    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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