Market-Based Redispatch in Zonal Electricity Markets
26 Pages Posted: 19 Nov 2018
Date Written: November 19, 2018
European electricity markets are geographically organized in zones, which often resemble countries. Overload of power lines within zones have to be relieved through other means than the electricity market, e.g. so-called “redispatching” of power plants. Traditionally, this has often been done through administrative measures with generators being obliged to participate. In recent years, with increasing pressure on power grids, numerous proposals have been made to organize redispatch through voluntary markets, including a proposal by the European Commission to make such market-based redispatch obligatory. This paper develops a simple graphical example of a zonal wholesale market with a locational redispatch market that can be explicitly solved. Using this model, we show the perverse incentives introduced by redispatch markets, identify optimal bidding strate-gies and determine Nash-equilibrium prices. We show that rational market parties engage in the so-called increase/decrease game, aggravating grid congestion and earning windfall profits. In particular, we show that such gaming works even absent any (locational) market power. With the paper, we hope to inform the European energy policy debate at a crucial crossroads.
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