Market splitting in Germany – New evidence from a three-stage numerical model of Europe

Abstract

With the sharp increase in redispatch measures seen during recent years, the importance of an efficient congestion management has increased, particularly in Germany. As the current market design, with a single bidding area, ignores the physical constraints of the transmission grid, there is an ongoing discussion about introducing price zones. Against this background, we develop a three-stage approach to model redispatch and market splitting for Germany while considering interactions with interconnected countries. We identify an increasing spatial imbalance between generation and load and delays in grid extension as being the main drivers for the increase of modeled redispatch volumes from 2012 to 2020. We show that market splitting reduces imminent congestion although results are sensitive to the zonal delimitation and corresponding net transfer capacities. The overall welfare effect is negligible, but price differences between the bidding areas investigated, i.e. one Northern and Southern price zone, result in considerable distributional effects. While consumers in Northern Germany would benefit – producer rents and in particular the value of wind energy would decrease – the opposite is true for Southern Germany. We conclude that market splitting constitutes a solution to reduce redispatch measures as long as transmission grid expansion is further delayed.