Zonal vs. Nodal Pricing: An Analysis of Different Pricing Rules in the German Day-Ahead Market

The European electricity market is based on large pricing zones with a uniform day-ahead price. The energy transition leads to shifts in supply and demand and increasing redispatch costs. In an attempt to ensure efficient market clearing and congestion management, the EU Commission has mandated the Bidding Zone Review (BZR) to reevaluate the configuration of European bidding zones. Based on a unique data set published in the context of the BZR, we compare various pricing rules for the German power market. We compare market clearing and pricing for national, zonal, and nodal models, including their generation costs and associated redispatch costs. Moreover, we investigate different non-uniform pricing rules and their economic implications for the German electricity market. Our results indicate that the differences in the average prices in different zones are small. The total costs across different configurations are similar and the reduction of standard deviations in prices is also small based on this data set. A nodal pricing rule leads to the lowest total costs. We also analyze the quality of different pricing rules and their differences with respect to the quality of the price signals and the necessary uplift payments. While the study focuses on Germany, the analysis is relevant beyond and feeds into the broader discussion about pricing rules.