Evaluating Offshore Electricity Market Design Considering Endogenous Infrastructure Investments: Zonal or Nodal?

TL;DR

This paper analyzes how different offshore electricity market designs, especially pricing schemes, influence infrastructure investments and profitability of offshore wind farms and electrolyzers, using a bilevel modeling approach.

Contribution

It introduces a bilevel model that evaluates the impact of market design choices on offshore infrastructure investments and dispatch, highlighting the superiority of full nodal pricing.

Findings

Full nodal pricing outperforms other market designs.

Combining onshore zonal with offshore nodal pricing reduces wind farm profitability.

Low-cost electrolyzers can boost offshore wind revenues.

Abstract

Policy makers are formulating offshore energy infrastructure plans, including wind turbines, electrolyzers, and HVDC transmission lines. An effective market design is crucial to guide cost-efficient investments and dispatch decisions. This paper jointly studies the impact of offshore market design choices on the investment in offshore electrolyzers and HVDC transmission capacity. We present a bilevel model that incorporates investments in offshore energy infrastructure, day-ahead market dispatch, and potential redispatch actions near real-time to ensure transmission constraints are respected. Our findings demonstrate that full nodal pricing, i.e., nodal pricing both onshore and offshore, outperforms the onshore zonal combined with offshore nodal pricing or offshore zonal layouts. While combining onshore zonal with offshore nodal pricing can be considered as a second-best option, it generally diminishes the profitability of offshore wind farms. However, if investment costs of offshore electrolyzers are relatively low, they can serve as catalysts to increase the revenues of the offshore wind farms. This study contributes to the understanding of market designs for highly interconnected offshore power systems, offering insights into the impact of congestion pricing methodologies on investment decisions. Besides, it is useful towards understanding the interaction of offshore loads like electrolyzers with financial support mechanisms for offshore wind farms.