ANALYSIS OF THE TRANSFERABILITY OF PJM’S MARKET DESIGN TO THE
GERMAN ELECTRICITY MARKET
Katrin Schmitz, University Duisburg-Essen, , Chair for Management Sciences and Energy Economis 0201 183 2634,
Katrin.Schmitz@uni-due.de
Prof. Dr. Christoph Weber, University Duisburg-Essen, Chair for Management Sciences and Energy Economis, 0201 183 2966,
Christoph.Weber@uni-due.de
Overview
Germany’s target to produce 30% of the electric energy by renewables in 2020 and the corresponding Renewable
Energy Law (EEG) are the main drivers of the development of increasing renewable capacities seen in the last years
in Germany. In 2009 already 15% of gross electricity production has been produced by renewables – 6% by wind
alone. Installed wind capacity increased rapidly in the last years. With over 25 GW installed wind capacity in 2009,
Germany leads the way to the integration of new renewables into the electricity grid.
Against this background congestion management has become a serious issue not only in the German but in the
European electricity grid. Offshore wind will be more and more important in the next years. The potential offshore
capacity and energy production by offhore wind is high but acceptance will probably cause problems. The
integration of huge offshore wind parcs in the German North Sea will emphasize the North-South congestion
problem in the German electricity grid. Major production capacities and especially wind production is located in the
North of Germany while the electricity demand is mostly occurring in the center and the South. The German Energy
Agency analyzed the costs of integrating additional wind capacities in the German grid in two studies (DENA 1
(2005) and DENA 2 (2010)) and assumed already in the base scenario a required electricity grid extension of 3,600
km in 2020. Yet additional German offshore wind capacities will not only affect the German electricity grid but also
the grid of neighboring countries.
Besides zonal pricing and further market coupling notably nodal pricing is discussed in the literature as first-best
answer to deal with upcoming congestion management issues in Germany and Europe (e.g. Weigt et al. 2006,
Neuhoff et al. 2011). In the current German market design, a unique price for the whole of Germany is determined
in the power exchange and congestion is dealt with by redispatch from the grid operators. By contrast, nodal prices
take into account congestions from the outset by differentiating power prices between nodes on both sides of a
congested line. Nodal prices are thus expected to provide adequate signals not only for the operation of power plants
but also for the usage of transmission capacities. The American PJM interconnection is one of the most well-known
and long-lasting examples of a well-functioning nodal market.
Based on theoretical considerations, the implementation of a nodal pricing system like PJM in Germany is often
expected to be the most efficient congestion management alternative (cf. Weigt et al, 2006, Neuhoff et al. 2011). But
even if nodal pricing can be shown to be the first-best alternative, the benefits compared to a second-best alternative,
like the current German system may strongly depend on the characteristics of the system considered. Therefore a
detailed comparison of the system characteristics may be an important first step to assess the potential benefits of the
implementation of a nodal market design in Germany and to identify crucial issues to be solved ahead of an
implementation.
Methods
In this paper, key elements of the generation mix, the network structure and the consumption patterns as well as
organizational settings will be analysed to assess potentials and impediments for an implementation of nodal pricing
in Germany. The focus is on Germany as the largest market within Europe, but many results may also be
transferable to the broader European realm.
In the field of generation, a particular focus will be on the share of both new renewables and hydro. These are
expected to lead to important implications for adequate market design, notably to cope with forecast errors and with
shadow values of reservoir contents. A further element which influences market prices and market incentives are
capacity replacements and capacity additions.
Network structure may be charactersied by the density of the existing network and the density of the underlying
electricity consumption. Other indicators are the number of congestion events and the probability of uncongested
network operation.
On the consumption side notably the competition at the retail level and the participation of consumers in capacity
and reserve markets are considered and their interference with the wholesale market design is analysed.
Finally, also necessary institutional changes are investigated, notably the bundling of competences in the hand of an
ISO as compared to the decentralized model with TSOs and a voluntary power exchange.
Results
The results indicate that the initial situations in PJM and the German electricity markets are different in many
respects. An adoption of a PJM nodal pricing system in Germany therefore needs to take the differences in market
structure into account. Also the potential benefits are expected to be lower in the German context than in the US and
some new challenges for nodal pricing and ISO operation have to be solved before a successful adaptation to
Germany and Europe may be envisaged.
Conclusions
Local market conditions need to be considered carefully when implementing nodal pricing in well-established
electricity markets. Therefore any model based results on potential benefits of nodal pricing should be considered
with care and the implementation challenges should not be underestimated when aiming at establishing a nodal
pricing system in Germany or elsewhere in Europe.
References
DENA (2005): dena-Netzstudie, Energiewirtschaftliche Planung für die Netzintegration von Windenergie in
Deutschland an Land und Offshore bis zum Jahr 2020. Deutsche Energie-Agentur
DENA (2010): dena-Netzstudie, Integration erneuerbarer Energien in die deutsche Stromversorgung im Zeitraum
2015-2020 mit Ausblick 2025. Deutsche Energie-Agentur
Ding, Feng, and J. David Fuller (2005): Nodal, Uniform, or Zonal Pricing: Distribution of Economic Surplus. In:
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Hogan, William W. (1998): Transmission Investment and Competitive Electricity Markets. Harvard University, John
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