How does dividing Germany into bidding zones impact the market value of renewables?

Ariadne Project researchers find that a division would affect market values but with low impact on prices for consumers and industry.

In a newly published analysis for the Ariadne Project, Hertie School researchers Silvana Tiedemann, Clemens Stiewe, Corinna Kratzke (MPP 2023) and Professor of Energy Policy Lion Hirth, along with colleagues from the Fraunhofer Institute for Energy Economics and Energy System Technology (IEE), examine how dividing Germany into different electricity price zones would impact market revenues for renewable energies. This is important as renewable energies are the backbone of a climate-neutral electricity system: in 2030, they should cover 80 per cent of electricity consumption. Understanding how dividing Germany into the proposed two to five electricity price zones will affect the economics of renewables can help policymakers understand how to support the expansion of renewable energies.

Currently, Germany, together with Luxembourg, comprises one large electricity price zone. Due to grid bottlenecks and regional differences in how much renewable energy is produced, there is an imbalance in the market for energy between the north and south of Germany. Renewable energy from the north, where wind is plentiful, cannot always be transported to the south, which leads to a situation in which the south’s energy needs must be covered with more expensive gas or coal-generated power. This leads to more expensive energy overall. 

The researchers find that dividing the entire German electricity market area into several electricity price zones would increase the market value of renewable energies in southern Germany, while wind and photovoltaics would lose revenue in northern Germany. Average exchange electricity prices would rise slightly in the south of Germany and fall in the north, but this would only have a very limited effect on electricity prices for consumers and the associated incentives for industrial companies to choose a location.

In order to achieve federal expansion targets for renewable energy, the authors find that both photovoltaics and wind energy will require further support in the medium term. This is because the revenues from renewable energies fall as their market penetration increases. The authors suggest that the cross-zone market value should be applied to maintain the regional control effect of a bidding zone division while supporting new installations.

Read more here (in German).

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