Local Market Prices Can Reduce Electricity Costs

Abstract

With the liberalization of the electricity markets in 1998, Germany opted for a single, nationwide wholesale price. Regional differences in supply and demand are not taken into account. In the event of grid congestion, electricity generators are paid to adjust their output. This leads to rising costs, an overestimation of grid expansion requirements and increased bureaucracy. Reforms are therefore currently under discussion, in particular the division of the single bidding zone, local market prices and dynamic network tariffs. Whilst a division into large bidding zones only partially resolves the problems, local market prices can save the costs of resolving grid congestion whilst simultaneously generating congestion revenues. These can be used to hedge market participants against local price risks. To determine locally differentiated dynamic network tariffs, as recently proposed by the German Federal Network Agency, forecasts of supply and demand would be required with unattainable precision. Local market prices, on the other hand, are set in real time and do not rely on such forecasts. The extensive international available experience should be utilized to rapidly implement local market prices in Germany and other European countries.