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The relevance of grid expansion under zonal markets

Abstract:
The European electricity market design is based on zonal markets with uniform prices. Hence, no differentiated locational price signals are provided within these zones. If intra-zonal congestion occurs due to missing grid expansion, this market design reveals its inherent incompleteness, and might lead to severe short and long-term distortions. In this paper, we study these distortions with a focus on the impact of restricted grid expansion under zonal markets. Therefore, we use a long-term model of the European electricity system and restrict the allowed expansion of the transmission grid per decade. We find that the combination of an incomplete market design and restricted grid expansion leads to a misallocation of generation capacities and the inability to transport electricity to where it is needed. This results in an energy imbalance in some regions of up to 2-3% and difficulty when reaching envisaged political targets in the power sector. Keywords: Electricity Market, Grid Expansion, Incomplete Market Design, Misallocation, Energy Imbalance

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Keywords: Electricity Market, Grid Expansion, Incomplete Market Design, Misallocation, Energy Imbalance

DOI: https://doi.org/10.5547/01956574.38.5.jber

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Published in Volume 38, Number 5 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.