Fighting the wrong battle? A critical assessment of arguments against nodal electricity prices in the European debate

Abstract

Contrary to liberalized U.S. electricity markets that apply nodal pricing, European power markets rely on uniform pricing within bidding zones. Europe's zonal pricing model is challenged by an increasing mismatch between network and generation expansion within bidding zones, as well as the complexity of adequately redefining the existing bidding zone configuration. A potential solution is to transition to nodal pricing. The academic literature provides strong evidence of significant cost savings from such a transition. The question is: Why has nodal pricing persistently been discarded in Europe? It cannot be denied that implementing nodal pricing would require significant changes to the European market design. However, the debate in Europe has mostly focused on perceived flaws of the concept of nodal pricing. In this paper, we identify the main arguments against the concept of nodal pricing brought forward by European stakeholders. We group the arguments into the six categories: susceptibility to market power, barriers to unlock flexibility, market liquidity concerns, increased investment risks, unmanageable complexity, and political undesirability of locational price differentiation. Our contribution is to critically assess each of the arguments. We demonstrate that they do not explain, nor justify, the opposition to nodal pricing.