Price zone split would be the right signal

09/28/ 2023
Source: Energy & Management Powernews

Separating Germany's electricity market into two price zones would bring much higher prices for industrial regions in the south. Aurora has quantified the spread.

The division of Germany into a northern and a southern price zone is being discussed, among other things, as part of the debate on reforming the European electricity market. Proponents want to reduce the high load on the German transmission system, which plays an important role in the European electricity market.

One problem with the German electricity market is that electricity generation is increasingly taking place in the north, where conditions are particularly favorable for the deployment of wind turbines. However, the large, industrial consumers are predominantly located in the south of the country. "This imbalance puts a strain on the power grids and hinders the energy transition," according to a study now published by the Aurora Energy Research institute.

At the same time, there is a lack of price signals that could bring about a new equilibrium in German wholesale electricity. Therefore, according to Aurora's energy market expert Nicolas Leicht, the most likely solution would be a division of the German market into a price zone in the north and one in the south. In his view, it could generate the necessary price signals and lead to the formation of different wholesale prices.

In 2030, the spread would start at 5 euros/MWh

Aurora assumes that the megawatt hour of electricity would be at least 5 euros more expensive in southern Germany than in the north in 2030. The difference could rise to 9 euros by 2045. This prospect could steer more investment into grid expansion and new generation in the south. However, he said, grid expansion is subject to major uncertainties. Delays in the construction of new pipelines could cause price differentials to rise as high as 13 euros by 2030 and 24 euros by 2045.

Electrolysers in the north could dampen differential

A reduction in the price differential could be brought about by building electrolysers to produce green hydrogen predominantly in the north. Co-author Leicht: "If 4 gigawatts of electrolysis capacity were located in the north instead of the south, there would be only a 6-euro price differential between wholesale electricity prices in 2045."

There would be an incentive for this, because flexible consumers such as electrolyser operators would benefit most from the price zone split. Not only would they be able to purchase their power at lower average prices in the north, but they would also enjoy frequently occurring rock-bottom prices during periods of high wind power. "Moreover, since the share of renewables in the electricity mix would be very high in the northern zone," adds Licht's colleague Claudia Günther, "electrolysers could produce green hydrogen with grid electricity much earlier than would be possible with a uniform electricity zone." This would increase the competitiveness of green hydrogen by a third. Industrial consumers in the south could benefit if hydrogen pipelines were expanded quickly enough

Energy-intensive industry most affected

The establishment of a northern and southern price zone in Germany would affect individual consumer groups differently. For private households, the effect would be "negligible," according to Aurora. Energy-intensive industry in the south would be hit harder, facing prices that would be 3 to 7 percent higher than in the single price zone. In absolute terms, that would be a burden of around 400 million euros a year. This would put it in a worse position in international competition.

For large consumers who participate in wholesale, procurement in the divided price zone would also be more difficult because the futures markets would be less liquid in a smaller price zone. In any case, concluding supply contracts - especially PPAs across the price zone border - would also be more complex. Still, Leicht explains, it's clear that more regional and local price signals would be needed to transform the energy system: "As our calculations show, splitting the German price zone would bring about those price signals."

Author: Tom Weingärtner