Endogenous price zones in the German electricity market

This project investigates, with the help of the EnCN electricity market model, how price zones in the electricity market should be configured in order to optimally govern investment and production decisions in the long term. An application to the German electricity market shows that even a small number of optimally configured price zones can lead to considerable welfare gains. This project is based on earlier models where the price zones are exogenously given.

Research question

How should price zones be configured in an existing network?
How does this influence the optimal management of long-term investment and production decisions?
How does the current discussion about changing the price zone configuration in Europe proceed?

Methodology

Development of a multilevel equilibrium model to endogenously determine welfare-maximizing price zones for a given electricity market, and analyze their impact on market outcomes.
Application to the German electricity market to examine the impact of an optimal zoning on market outcomes such as welfare, generation mix and locations, or electricity prices.

Results

Significant welfare gains already for small number of optimally chosen zones.
Better signaling of generation and transmission bottlenecks in the short term.
More efficient allocation of generation capacities in the long term.

Publication

Ambrosius, M., Grimm, V., Kleinert, T., Liers, F., Schmidt, M., & Zöttl, G. (2018). Endogenous Price Zones and Investment Incentives in Electricity Markets: An Application of Multilevel Optimization with Graph Partitioning.

Kleinert, T., & Schmidt, M. (2018). Global Optimization of Multilevel Electricity Market Models Including Network Design and Graph Partitioning.

Grimm, V., Kleinert, T., Liers, F., Schmidt, M., & Zöttl, G. (2017). Optimal price zones in electricity markets: a mixed-integer multilevel model and global solution approaches. Optimization Methods & Software, 1-31. https://dx.doi.org/10.1080/10556788.2017.1401069

Grimm, V., Martin, A., Schmidt, M., Weibelzahl, M., & Zöttl, G. (2016). Transmission and generation investment in electricity markets: The effect of market splitting and network fee regimes. European Journal of Operational Research, 254(2), 493-509. https://dx.doi.org/10.1016/j.ejor.2016.03.044

Grimm, V., Martin, A., Weibelzahl, M., & Zöttl, G. (2016). On the long run effects of market splitting: Why more price zones might decrease welfare. Energy Policy, 94, 453-467. https://dx.doi.org/10.1016/j.enpol.2015.11.010