Smaller bidding zones in European power markets: liquidity considerations

The European electricity market is based on a zonal approach and its current Bidding Zone (BZ) configuration may not cope well with the increasing amounts of renewable generation and related expected (structural) congestion in the physical system. This may trigger the need to design smaller BZs. However, this is met with opposition by some stakeholders. In particular, it is argued that smaller BZs introduce more price volatility and tend to complexify risk mitigation practices. Liquidity is complex to accurately measure and the data used to support a direct (either positive or negative) correlation with smaller BZs may have been incomplete or anecdotal. Instead, it is argued that the search for the optimal BZ configuration should aim to make (spot) prices right first. However, the ability to hedge the remaining transmission risk becomes paramount, but current hedging tools are rather inadequate. The study therefore advocates for the replacement of PTRs in favour of financial rights such as FTRs, and for the concurrent design and auctioning of these products at European level.

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“The study is carried out for the European Commission and expresses the opinion of the organisation having undertaken them. To this end, it does not reflect the views of the European Commission, TSOs, project promoters and other stakeholders involved. The European Commission does not guarantee the accuracy of the information given in the study, nor does it accept responsibility for any use made thereof.”