One Price Fits All? On Inefficient Siting Incentives for Wind Power Expansion in Germany under Uniform Pricing

Abstract

This paper evaluates investment incentives for wind power under two market designs: uniform and nodal pricing. An electricity system model is developed, that allows for investments in wind power capacities while carefully accounting for static transmission grid constraints. Wind power capacities are assumed to reach the same expansion target by 2030 under both market designs. The results show that the introduction of nodal prices leads to investments in wind power plants shifting to locations with lower wind yield. The amount of electricity fed into the grid from wind power plants, however, is higher under nodal pricing as curtailment is reduced by two-thirds. Furthermore, grid-optimal wind locations are shown to require higher direct subsidy payments but decrease yearly variable supply costs by 1.5% in 2030. Yet distributional effects present an obstacle to the introduction of a nodal pricing regime, with about 75% of German demand facing an increase in electricity costs of about 5%. To mitigate the distorted investment signals arising from uniform pricing regimes, restricting investments within grid expansion areas proves to be more promising than including latitude-dependent generator-component in the grid tariff design.