Update on the Bidding Zone Review

On July 19th, the ENTSO-E (the network of European electricity TSOs) launched the public consultation on the Bidding Zone Review. This opens a fundamental discussion about the European electricity market. Let’s zoom in on what bidding zones are, and what is being discussed.

“How do we model the European electricity market?”

An alternative would be a nodal model, which would give the best representation of the physical system, trying to find a price (and associated trades/flows) for each node of the electricity network in Europe. However, this would be an incredibly complex task! So, as a trade-off between computing efficiency and representing the physical network adequately, the European electricity market is structured as a zonal market – based on Bidding Zones (i.e., each bidding zone is an area that clears at a single price).

How Bidding Zones work

A useful mental image to visualise the European grid is as copper plates connected: while transmission within each plate (i.e. Bidding Zone) is considered infinite, connections between different zones are limited. Market coupling aims to optimise the use of the limited transmission capacity between zones (Cross-Zonal Capacity).

This zonal model aims to reflect the “bottlenecks” via bidding zone borders and allocates capacity via market mechanisms (governed by a central algorithm). When looking at those bottlenecks, these tend to occur at political borders and/or in areas of lower population density (often reflected in limited network infrastructures).

Are current Bidding Zones reflecting reality?

The current borders mostly coincide with the political borders of a country. This makes sense: historically, each county built its electricity network to ensure efficient transmission to all its citizens – but with less investment in cross-border infrastructure. However, countries with a large surface and/or peculiar shape and distribution of population can contain more than one bidding zone. This is the case for Denmark, Italy, Sweden, Norway (see map below).

Overview of Bidding Zones in Europe

Other Bidding Zones, however, show ‘structural’ congestions (i.e., very frequent and localised in the same area) within a single Bidding Zone. This is the case for Germany and France, for example.

The process behind this Bidding Zone Review

According to EU regulation 2019/943, Bidding Zone (BZ) borders shall be based on long-term, structural congestions in the transmission network. TSOs are now required to conduct a common, 12-month-long study on alternative Bidding Zone configurations. The purpose of the review is to increase economic efficiency and cross-zonal trading while maintaining security of supply in the EU. This review is a long process, with a long history. Discussions between TSOs and regulatory authorities about the methodology used in the review started in 2019. In 2022, TSOs concluded a Locational Marginal Pricing (LMP) simulation (requested by ACER in 2020) to inform decisions on alternative configurations. This summer, the TSOs launched a common public consultation, which invited stakeholders to give feedback on the impact of bidding zone changes on liquidity & transaction costs (LINK) and the transition costs of bidding zone reconfigurations (LINK). The consultation process ended this month. A final common report and approval are expected by the end of 2024. You can find more on ENTSO-E’s website (LINK).