Germany’s Energy Policy Needs a European Perspective

The new European Bidding Zone Review report published by the European Network of Transmission System Operators for Electricity concludes that a split of the current German-Luxembourg bidding zone into several bidding zones would significantly enhance the efficiency of the European electricity market.

The report recommends a split into five zones. This would mean that in times of regional electricity shortages due to a lack of transmission capacity, up to five different local electricity prices could emerge in Germany. ZEW President Professor Achim Wambach, PhD and Dr. Marion Ott, deputy head of ZEW’s Research Unit “Market Design” comment on this:

“Germany is currently holding back the development of the European electricity system. Neither Europe nor Germany can afford this.

Regional bidding zones would help to solve two of the four fundamental problems of the German energy market identified by the Federal Ministry for Economic Affairs and Climate Action in its report titled ‘Electricity Market Design of the Future’: the insufficient flexibility of electricity demand and the lack of regional incentives for electricity generation and demand. The electricity system needs more flexibility on the demand side so that it can adapt to the fluctuating and increasing supply of non-dispatchable renewable energies. This flexibility must be tailored to local supply in order to be helpful for the system. With the uniform electricity price for the German-Luxembourg zone applicable under the current electricity market design, there is no price signal to balance local supply and demand. This leads to misallocations that exacerbate transport bottlenecks due to a lack of power lines.

Regional prices reflect local electricity shortages in relation to the defined bidding zones. If consumers and batteries respond flexibly to these regional prices, they help to make better use of the supply of renewable electricity as well as of the existing transmission grids within Germany and connecting neighbouring European countries.

The current bidding zone makes electricity trading with Germany unattractive for some European neighbours. As a result, they have little interest in an expansion of the electricity grid, which limits electricity imports and exports in times of surplus or shortage, even though increased trade would enhance efficiency.

The recommendation to introduce several bidding zones in Germany is well-founded. Regional prices would help solve problems in the German electricity market while contributing to Germany's integration into the European electricity market. Instead of adopting a defensive stance, Germany should look into implementing regional pricing and develop possible compensation mechanisms for regions that may be affected – at least initially – by higher prices in their region.”