Local pricing could bring electricity costs down, increase supply security in Germany – think tank

Setting up multiple local pricing zones instead of having one big market area could help bring electricity prices down in Germany and increase supply security, according to a report by think tank Agora Energiewende. Under such a local hub system, the majority of households and businesses would benefit from lower electricity prices, with the modelled cost advantage across Germany averaging six euros per megawatt hour in 2023, the report concluded.

Germany currently has a single electricity bidding zone, meaning that wholesale power prices do not factor in where electricity was generated in the country. Producers, such as wind parks and coal plants, can freely trade electricity with utilities or businesses across the country without having to worry whether there is enough capacity in the form of power grids to transport it. However, this does not reflect current grid bottlenecks between the country's wind power rich north and industrial demand centres in the south. German grid operators increasingly have to carry out expensive balancing measures to ensure grid stability, such as re-dispatch, curtailing renewables and distorting prices.

"In order to make the electricity system future-proof and avoid high costs, price signals are needed that realistically reflect local production and demand," said Agora Energiewende's managing director, Markus Steigenberger. The uniform electricity price zone creates false incentives – for example, electric cars and heat pumps currently have no incentive to adjust their consumption to avoid bottlenecks – with redispatch measures amounting to 3.2 billion euros in 2023 and likely to increase further in the coming years, the think tank noted.

"Local prices make it possible to match supply and demand more precisely, thereby utilising the transmission grid more evenly," it said. It would also help to maintain a high level of security of supply in the electricity system and reduce overall costs. Market revenues for producers – especially for wind energy in the north – would decline, the report added.

Germany's likely coalition government has said it supports a single bidding zone, yet the debate will only increase in importance, especially as more flexible consumers – including hydrogen electrolysers, electric vehicles, heat pumps and storage facilities – form part of the future, renewables-based electricity system. The European transmission system operator (TSO) association ENTSO-E will publish its "Bidding Zone Review" on 28 April. In it, the TSOs could recommend the splitting of Germany's bidding zone into two or more areas, as is the case in Sweden, Italy, Norway and Denmark already.