A Time-Variant Welfare Economic Analysis of a Nodal Pricing Mechanism in Germany

Abstract

Nodal pricing has emerged from a theoretical approach to a practicable and efficient tool for network and congestion mangement. Experiences from North America and New Zealand have proven nodal pricing to be workable without serious technical problems. Continental European electricity grids like the German one are still based on a uniform pricing mechanism. This study simulates to model a nodal pricing mechanism in the German high voltage grid to estimate the impacts on electricity prices, generation and consumption. In particular, the impact of varying wind energy is analyzed since none of the existing nodal pricing markets has comparable wind capacities. The model is based on reference days with a 24 hour scheme taking into account unit commitment decisions and partial load conditions. Power flows are calculated based on the DC Load Flow Model using a slightly modified version of the traditional approach (Schweppe et al., 1988, Stigler and Todem, 2005). The results show that a nodal pricing mechanism yields a higher social welfare than a uniform price. The impact of wind energy on a nodal pricing mechanism is within predictable boundaries. The results also indicate that nodal pricing is a sufficient tool for estimating necessary grid extensions due to offshore wind capacity implementations.