Bidding Zone Review

On October 12, ACER initiated a decision-making procedure concerning proposed alternative bidding zone configurations for the Baltic region. This move follows the receipt of the Locational Marginal Pricing (LMP) analysis results conducted by the Baltic TSOs [ACER]. Note that according to ACER Methodology, LMP serves only as a methodology for reviewing the existing bidding zones.

Why review bidding zones?

Currently, bidding zones in Europe are mostly defined by national borders. However, the existing European electricity target model requires defining bidding zones based on network congestion. Better defined bidding zone configurations, i.e. borders based on long-term, structural congestion, can potentially bring several benefits such as increased opportunities for cross-zonal trade and better locational signals for new investments.

What is Locational Marginal Pricing?

Locational Marginal Pricing (LMP), also known as ‘Nodal pricing’, is a method of pricing electricity at a specific location within a grid to reflect the cost of delivering electricity to that location. LMP is used in several countries, notably the U.S., New Zealand & Singapore.

Currently, the EU has ‘zonal markets’ characterized by a single price per bidding zone whereas the network is considered to be a copperplate, i.e. no congestion is assumed to occur within the zone. As a result, actual internal congestion is not priced into the wholesale market price and is instead handled by the TSOs ex-post.

Put simply, LMP provides a detailed, node-specific pricing structure reflecting precise grid conditions. Zonal markets offer a more “averaged-out” approach, simplifying the pricing at the expense of accuracy in reflecting local grid conditions.