The business associations jointly warn against splitting the single German electricity bidding zone: the negative effects on the real economy are not foreseeable and outweigh any theoretical advantages. There are better ways to drive forward the energy transition, promote equal living conditions and secure high-quality employment.
THE EUROPEAN ELECTRICITY MARKET
The European electricity market is built on a stable foundation: trading in so-called electricity bidding zones. Within these uniform bidding zones, the same wholesale prices apply to all producers and consumers. A uniform electricity bidding zone applies throughout Germany. With this fundamental decision, the electricity market also makes its contribution to ensuring good working conditions and preserving economic unity.
Other markets, such as in the USA, where local prices are often calculated at individual grid nodes, work differently. Here, the focus is also on the efficiency of physical dispatch based on historical experience. In Europe, the focus is on the liquidity of the long-term markets. These fundamentally different approaches cannot simply be mixed up. And so the recently adopted EU electricity market reform is rightly a clear commitment to the zonal organization of the European electricity markets in different bidding zones and against the introduction of a nodal price system with central dispatch. With this step, the European Commission is also strengthening the long-term markets in Europe.
An essential prerequisite for a functioning economy is predictability: producers must not only know what electricity will cost tomorrow, but also have a reliable expectation of the electricity price for several years. This applies to industrial companies as well as private customers who expect stable tariffs from their suppliers. In order to create this predictability, it is possible to trade electricity volumes on an agreed date. This long-term trading allows for sophisticated risk management, the hedging of flexibility or credit risks from bilateral trading. This contrasts with the short-term purchase of electricity on the spot market. The highly liquid futures market in Germany was one of the reasons why the country weathered the 2022 energy price crisis comparatively well. Companies that had not hedged for the long term had to pay the heavily fluctuating electricity prices on the spot market. The German-Austrian electricity bidding zone was split in 2018. Both Austria and the Scandinavian countries now secure their long-term supply via stable futures market trading in Germany. Functioning futures market trading in Germany is therefore also key for the European context.
CHALLENGES ARE UNDISPUTED
While producers and consumers need planning security and therefore stable, uniform futures trading, the physical distance between consumers and producers poses physical challenges for the grid. In Germany, the majority of renewable generation is located in the north and east of the country, while the industrial centers are in the south and west. Electricity that is generated in a decentralized and climate-neutral manner must therefore be transported over long distances. This requires a well-developed transmission grid. However, not every hour and not every time of day has sufficient installed capacity to balance this over long distances. In some cases, surplus generation has to be curtailed. As a result, power plants are ramped up at other locations to keep supply and demand in balance. This process is called redispatch. The EU stipulates that electricity bidding zones must not have any structural bottlenecks in the long term. In 2019, Germany presented an action plan to open up cross-border power lines more to trade. Germany is currently adhering to this action plan to achieve 70% of exchange capacity with other countries.
THE DEBATE NEEDS A REALITY CHECK REAL MIGRATION INSTEAD OF SETTLEMENT
The expectation is expressed that a split in the German electricity bidding zone would be accompanied by additional industrial companies relocating to zones with supposedly lower electricity prices. At the same time, it is emphasized that price differences over the year between the newly created bidding zones would not be very high. This promise is doubly misleading: electricity prices in Germany already represent a locational disadvantage in an international comparison. A division of electricity bidding zones would cause electricity prices to rise, particularly in the industrially strong southern and western parts of Germany. However, this would not lead to industrial companies deciding to relocate or relocate within Germany. Most existing production sites, with their networks of different companies and established value chains, cannot be relocated. Price differences within Germany increase the overall locational disadvantage, also because the regulatory risk of further electricity bidding zone sharing is growing from a business perspective. This uncertainty threatens a massive loss of industrial value creation and good jobs in Germany.
PARADOXICAL SITUATION FOR RENEWABLES
In addition, there are compounding negative effects on renewable energy producers: on sunny or windy days with an oversupply of green electricity, electricity prices in zones with a high proportion of renewable energy would fall drastically and sharply. What initially looks like an advantage for consumers would, however, be a problem: on the one hand, the market values of renewable energies would be significantly reduced, which would lead to a higher financial hedging requirement. Secondly, electricity prices would rise significantly in areas with lower volumes of renewable energy. This would also be extremely negative for consumers.
Within a reduced electricity bidding zone, there are significantly stronger reactions to additional producers or consumers. This increases the uncertainty about expected revenues and costs for investors. As a result, urgently needed investments are reduced and the expansion of renewables is hampered.
In principle, there are also pragmatic arguments against the division into bidding zones: Implementation would be highly complex. A division into several bidding zones cannot be implemented at the push of a button, but would take several years. Various important questions would have to be answered and the markets would have to be fundamentally reorganized. For market participants such as energy producers or industry, this would initially create one thing above all: considerable uncertainty in times of urgently needed transformation.
If an electricity bidding zone division had been implemented five years ago, this would have taken place along the Main Line. In contrast, the power bidding zone division being considered today is planned much further north. A division into up to five or more bidding zones is also conceivable, rather than necessarily a division into two. As the expansion of renewable energies and grids becomes more dynamic, existing grid bottlenecks will ultimately be resolved. At the same time, further bottlenecks may emerge. This means that once a bidding zone has been drawn up, it is always called into question. Based on the grid development plans and the expansion of renewable energies in the new federal states, new zones may have to be drawn up in another five years. This would mean a loss of reliability for investments.
AVOIDING THE CONCENTRATION OF MARKET POWER
Proponents of splitting the electricity bidding zone argue that this would balance supply and demand regionally. However, this seemingly elegant approach would have significant negative effects for the economy, for the energy transition and for all market participants, including consumers: if a bidding zone is split up, the trading volume decreases and with it the number of players. A dominant market position of a few players becomes more likely and consumers are exposed to greater uncertainty.
TACKLING CHALLENGES IN THE EXISTING SYSTEM
It is true that the current challenges in the network must be tackled. However, it would be short-sighted to narrow the solution corridor to the option of electricity bidding zone sharing alone. If we now risk the expansion of renewables collapsing, industry no longer seeing a future and postponing urgent investments or even leaving the country, we will face far greater economic and social challenges.
Focusing the discussion solely on electricity prices on the short-term spot market falls short of the mark. The scope for solutions is much larger and encompasses the entire value chain. For example, local incentives outside the spot market can contribute to the solution. The challenges in the grid can only be solved in the long term through physical expansion: There needs to be more storage, more electrolysis, more direct supply to commercial and industrial SMEs and better use of the existing grid infrastructure. These solutions are more complex than drawing a line on a map, which entails incalculable economic risks, but they fundamentally solve the challenges.
Redispatch costs money; grid expansion costs money. But in the end, we will create a liquid electricity market in Germany that can serve as a model for the energy transition - in conjunction with the various renewable technologies and the different regional conditions in Germany. With a good framework, the real economy can mobilize private capital for the ambitious continuation of the energy transition, build up good employment in parallel and thus organize more value creation in Germany. To achieve this, it is worth tackling the complex tasks.
Source: Home :: Bundesverband Erneuerbare Energie e.V. (bee-ev.de)
