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The cost of fairness in electricity markets

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  • Linnenbrink, Daniel

Abstract

European policymakers argue that bidding zones with uniform prices ensure fairness in electricity markets. Since the outcome of such a fair spot market is often infeasible due to network constraints, a second stage is needed: the redispatch. I establish a mechanism design result showing that even a minimal fairness restriction on the first stage strictly increases procurement costs for asymmetric dispatches. In detail, I analyze a market-based redispatch mechanism where inc-dec gaming creates arbitrage profits for those producers that benefit the network the least. These results identify a general cost of fairness in sequential markets and question uniform bidding zones in electricity markets.

Suggested Citation

  • Linnenbrink, Daniel, 2026. "The cost of fairness in electricity markets," ZEW Discussion Papers 26-040, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:343566
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    References listed on IDEAS

    as
    1. Par Holmberg & Ewa Lazarczyk, 2015. "Comparison of Congestion Management Techniques: Nodal, Zonal and Discriminatory Pricing," The Energy Journal, , vol. 36(2), pages 145-166, April.
    2. Neuhoff, Karsten & Barquin, Julian & Boots, Maroeska G. & Ehrenmann, Andreas & Hobbs, Benjamin F. & Rijkers, Fieke A.M. & Vazquez, Miguel, 2005. "Network-constrained Cournot models of liberalized electricity markets: the devil is in the details," Energy Economics, Elsevier, vol. 27(3), pages 495-525, May.
    3. repec:aen:journl:ej36-2-07 is not listed on IDEAS
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    Keywords

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    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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