Zonal vs. Nodal Pricing: An Analysis of Different Pricing Rules in the German Day-Ahead Market

TL;DR

This paper compares zonal and nodal pricing in the German day-ahead electricity market, showing that nodal pricing can significantly reduce costs and uplift payments compared to zonal models, informing EU market design decisions.

Contribution

It provides a comparative analysis of different pricing rules, including zonal and nodal, using a unique dataset and numerical experiments relevant for European market reforms.

Findings

Nodal pricing reduces total costs by 5-6% compared to zonal configurations.

Differences in average prices across zones are minimal, with small cost variations.

Nodal pricing significantly lowers uplift payments, impacting market efficiency.

Abstract

The European electricity market is based on large pricing zones with a uniform day-ahead price. The energy transition leads to changes in supply and demand and increasing redispatch costs. In an attempt to ensure efficient market clearing and congestion management, the EU Commission has mandated the Bidding Zone Review (BZR) to reevaluate the configuration of European bidding zones. Based on a unique data set published in the context of the BZR for the target year 2025, we analyze the short-run effects of various pricing rules for the German-Luxembourgish bidding zone. We compare market clearing and pricing for different zonal models, including their generation and redispatch costs. In numerical experiments with this dataset, the differences in the average prices in different zones are low. The total costs across different configurations are similar and the reduction of standard deviations in prices is also small. This might be different with other load and generation scenarios, but the BZR data is important as it was created to make a decision about splits of the existing bidding zones. We can replicate several results from the BZR study, except the large cost savings when moving from one to two price zones in Germany and Luxembourg. In addition to the four zonal configurations analyzed in the BZR study, we compare these against a nodal pricing system. While the total cost savings after introducing zonal splits were less than 1%, nodal pricing led to savings of 5-6%. We also evaluate differences of nodal pricing rules with respect to the necessary uplift payments, which is relevant in the context of the discussion on non-uniform pricing in the EU. While the study focuses on Germany, the analysis is relevant beyond and feeds into the broader discussion about pricing rules in non-convex markets.