Price zone splitting - the north in favor, the south against?

In general, the European internal market for electricity is divided into different price zones, which usually correspond to the borders of the member states. Within a price zone, there is a homogeneous price for supply and demand. This means that grid bottlenecks for electricity transport within the price zone are not taken into account in pricing, but are compensated for by redispatch measures by the grid operators.

Electricity exchange - also across borders - crucial for pricing

Interconnectors between the EU member states, non-member states such as Switzerland and Norway and the neighboring price zones ensure a physical connection and the exchange of electricity between the individual countries and regions. However, the capacities of these power lines are limited, meaning that a complete balancing of volumes - with a flow of electricity from the zone with lower prices to the zone with higher prices - is not possible and price differences between the price zones may remain.

Germany's energy supply is being fundamentally restructured as part of the energy transition: Power plants using nuclear and fossil fuels are and will be successively replaced by renewable energies - in conjunction with a more efficient use of energy. It should be noted that all national regulations are embedded in the comprehensive EU legislative package on energy and climate policy - the Clean Energy Package (CEP) “Clean Energy for all Europeans”, which was adopted by the EU Council of Ministers on 22.05.2019. This legal framework defines the rules of the game for the electricity market in Europe and has a significant influence on the future design of the electricity market.

Functioning internal market for the integration of renewable energies

The CEP is intended to complete the internal market for electricity in the EU and maximize cross-border electricity trading with sufficient trading capacities because, according to the EU Commission's reasoning, cross-border competition can only be increased and the integration of renewable energy sources promoted with greater cross-zonal trading capacities.

European regulations for cross-border capacities

But what is “sufficient trading capacity” and who checks the CEP requirements? The EU Regulation on the internal electricity market [1] provides the answers: According to Article 16 (8), transmission system operators (TSOs) in EU member states must reserve at least 70 percent of the transmission capacity of their network elements for cross-border trading between EU member states from January 1, 2020, or after a transitional period until December 31, 2025 at the latest. The European Commission, together with the Agency for the Cooperation of Energy Regulators (ACER), will check whether these requirements are being met. Where structural differences between the existing generation capacities and the demand volume with corresponding grid bottlenecks already exist or have been identified, the EU Electricity Single Market Regulation provides for two alternative approaches: Either the EU member states immediately introduce new price zones along the bottlenecks or they present an action plan for reducing the bottlenecks within a certain period of time.

“Bidding zone action plan” in Germany and Luxembourg

The splitting of price zones is not new in itself, as Sweden already introduced four price zones in 2011, Denmark has two price zones and Italy even has seven. Together with Luxembourg, Germany forms a single price zone for the electricity market, but has decided against price zone splitting in favor of a “Bidding Zone Action Plan” [2] to eliminate structural bottlenecks and submitted it to the EU Commission at the end of 2019.

The plan sets out the measures to be taken to meet the 70% criterion by the end of 2025. According to the BMWK, the core elements of the action plan are an accelerated expansion of the transmission grids and the optimization of existing grids. For example, so-called phase-shifting transformers are to be used at some interconnectors in order to better control the flow of electricity in the grid and thus increase the overall transport capacity. The overarching goal of the “Bidding Zone Action Plan” is to maintain a uniform German bidding zone and strengthen cross-border electricity trading. According to the legal review by the Federal Network Agency in 2021, the implementation of the action plan was on track and the TSOs' report on the progress of implementation was approved accordingly [3]. Nevertheless, the 70% target has not yet been achieved.

European regulatory authority ACER calls for price zones

The existing delays in grid expansion, the associated high grid congestion management costs of €4.2 billion in 2022 [4] and unwanted electricity transports via our neighboring countries and back again (such as ring flows via Poland and the Czech Republic) have brought the European regulatory authority ACER onto the scene: In August 2022, it proposed dividing the German electricity market into two to five price zones, as structural grid bottlenecks obviously existed and still exist in the German price zone despite the action plan. As part of a bidding zone review, the German TSOs must now examine whether the new bidding zones proposed by ACER are expedient. However, there is no obligation to introduce price zones - provided the requirements of the CEP and, above all, the 70 percent criterion are met by the end of 2025. The preparation of the bidding zone review by the German TSOs announced for 2024 will be decisive for further developments.

Effects of price zones in Germany

What happens if the 70 percent target is not achieved? And how could the price zones be structured? The Member States concerned - or the European Commission as the final authority - must decide this. In the following, we will try to explain what impact this would have on market participants:

Effects on consumers

If new price zones are introduced in Germany, this will mean lower electricity prices for consumers in regions with a surplus of generation and higher prices for consumers in regions with an undersupply. Due to the ongoing expansion of wind power in the north and north-east, consumers are likely to be happy, while customers in the west and south with less electricity supply would be more likely to pay more.

The consultancy Aurora Energy Research has used simulations to calculate that this could result in a price difference of EUR 5 - 9/MWh for a baseload supply in the years 2030 - 2045. To put this into perspective: The price of a baseload for 2025 is currently around EUR 95/MWh, while the price for 2027 is around EUR 70/MWh. [5] It is questionable whether these price differences will really benefit or relieve customers, as the grid fees and state levies and taxes will certainly also be adjusted in the future and could neutralize these advantages or disadvantages in electricity procurement.

Effects on renewable energy projects

It is also questionable what impact the introduction of price zones could have on existing renewable energy projects and contracts. Projects in the north and north-east will certainly have to reckon with a loss of revenue and the economic viability of existing and new projects will come under severe pressure in some cases. It is foreseeable that the price differences will work in favor of the more expensive south and west and trigger increased investment in renewable energy projects. In addition, it is another matter whether it makes economic sense to expand wind power in weaker wind regions. Securing financing via power purchase agreements with terms of ten and often 15 years may also have to be renegotiated if generation and purchase are not in the same price zone and no provisions were agreed when the contract was concluded.

Effects on industry

The hope that new industries will locate in the cheaper price zones is also doubtful, as such investments are not made solely on the basis of the level of electricity prices, but are dependent on many other location factors - such as access to general infrastructure, the availability of skilled workers in the region or the level of state subsidies.

Effects on redispatch and liquidity

Two consequences are highly likely to occur in the event of price zone splitting: Firstly, the costs of redispatch measures will fall significantly. Secondly, the introduction of two or more price zones will reduce the liquidity of the wholesale market, particularly on the short-term day-ahead and intraday market in the individual price zones. In a liquid market, electricity trading companies can quickly find a trading partner if, for example, a new feed-in forecast for a wind turbine arrives an hour before delivery. However, if this matching does not take place or does not take place quickly enough, the affected grid operators must compensate for changes in the feed-in forecasts of wind and solar plants more frequently and more expensively with balancing energy, the costs of which are passed on to all customers or customer groups in the grid area, instead of the electricity trading companies.

Conclusion

The issue of price zone splitting in Germany has not yet been conclusively decided and many market participants are questioning whether it makes sense. In view of the perhaps only temporary grid bottlenecks, such an intervention in the electricity market should be carefully considered, as grid expansion is progressing gradually in real terms.

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[1] https://eur-lex.europa.eu/legal-content/DE/TXT/PDF/?uri=CELEX:32019R0943&qid=1574665081379&from=DE

[2] https://www.bmwk.de/Redaktion/DE/Downloads/A/aktionsplan-gebotszone.pdf?__blob=publicationFile&v=4

[3] https://www.bundesnetzagentur.de/DE/Fachthemen/ElektrizitaetundGas/HandelundVertrieb/EuropElektrBinnenmarkt/
Downloads/Genehmigung_622_22_006.pdf?__blob=publicationFile&v=1

[4] https://www.bundesnetzagentur.de/SharedDocs/Downloads/DE/Sachgebiete/Energie/
Unternehmen_Institutionen/Versorgungssicherheit/Engpassmanagement/Ganzjahreszahlen2022.pdf?__blob=publicationFile&v=1

[5] Stand 15.05.2024.

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