Future-proofing the European power market
As Europe strives to become the first climate neutral continent, grid congestion is becoming an increasingly urgent issue, with the potential to lead to large-scale curtailment of renewables and undermine the system’s security. Accordingly, the Mission Letter to Commissioner for Energy and Affordable Housing Dan Jørgensen lists the task to improve locational price signals. These aim to ensure that investments occur where they are most beneficial to the system, while incentivizing an efficient operation of the system that takes into consideration the grid’s topology.
In this work, we assess three different regulatory scenarios, which correspond to locational price signals at different spatial resolutions: A Status Quo scenario, representing the current bidding zone configurations; a Multi Split scenario, which assumes that ambitious bidding zone splits lead to 101 zones; as well as a Locational scenario with locational marginal pricing and locational investment signals. Both zonal scenarios (Status Quo and Multi Split) are further assessed in combination with locational investment signals of a high granularity.
We identified significant system security concerns, i.e. substantial curtailment of load, associated with the Status Quo, as well as the Multi Split scenario – yet at a lower magnitude in the latter case. These concerns can be traced to an inefficient operation of flexibility – such as storage and demand response – due to insufficient information on existing bottlenecks being present in the market-clearing process. Any system cleared with locational marginal pricing, on the other hand, always led to perfect reliability – even when applied to the investment outcomes of the Status Quo and Multi Split scenarios.
Our results further suggest substantial cost savings in the context of the Locational and the Multi Split scenarios. By 2040, the Locational scenario could reduce the total system cost by 23 – 59 Bn. EUR annually. These savings are in the order of magnitude of those associated with the integration of European electricity markets. They are a result of lower firm capacity requirements and a higher utilization of low-carbon energy sources. In addition, consumers in 62-90% of the geographic cells underpinning the model benefit from more granular pricing in our case study, – depending on the scenario. Increases beyond 5 EUR/MWh occurred only within up to 1.2% of all cells.
Due to the reliability benefits and the substantial increase in economic efficiency suggested by our results, we recommend to implement locational investment signals in all relevant investment mechanisms and introduce locational marginal pricing as an element of the European target model.
THOMASSEN Georg;
FUHRMANEK Andreas;
2025-10-15
Publications Office of the European Union
JRC142047
978-92-68-32691-6 (online),
1831-9424 (online),
EUR 40495,
OP KJ-01-25-525-EN-N (online),
https://publications.jrc.ec.europa.eu/repository/handle/JRC142047,
10.2760/7466842 (online),
