Nodal Pricing in the German Electricity Sector - A Welfare Economics Analysis, with Particular Reference to Implementing Offshore Wind Capacities

Abstract

This paper compares the results of different pricing systems in the German electricity sector. In particular,we compare a competitive nodal pricing approach to a cost minimization scenario under a uniform price. The model also simulates the effects of increasing offshore wind energy in the North Sea, from the current 0 GW to 8 and 13 GW, respectively. Our model of the German electricity system includes 425 lines and 310 nodes of the 380-kV and the 220-kV grid. Power flows are calculated based on the DC Load Flow Model using a slightly modified version of the traditional approach (Schweppe et al., 1988, Stigler and Todem, 2005).

Demand is proxied by linear demand functions that are regionally differentiated. Our results show that the nodal pricing regime is more efficient than uniform pricing and that offshore wind input leads to a significant welfare gain. The model also indicates that 8 GW offshore wind would be accommodated by the current network without significant investments.

Keywords: electricity, nodal pricing, welfare, Germany, wind energy

JEL Classification: L94, L51, D61