Our paper [1] on the challenges faced by zonal pricing in terms of driving efficient short-term operations has been chosen as a runner-up for the 2021 best publication award in energy in the area of Energy and Resources of the Institute for Operations Research and the Management Sciences.
Zonal pricing is known to face numerous challenges related to short-term operational efficiency, gaming opportunities, and long-term investment signals. The present work focuses on the first issue (inefficiency in the day-ahead, intraday and real time), with a focus on quantifying avaoidable redispatch costs that are caused by an inaccurate representation of network constraints in zonal pricing models at the day-ahead stage of market operations, when units are nominated and committed.
Policy analyses of zonal pricing often depend on assumptions about the parameters of the zonal network. This introduces an undesirable degree of subjectiveness to the resulting conclucions. The paper sets forth a modeling framework for representing a best-case analysis of zonal pricing which does not depend on assumptions on the parameters of zonal network models, as well as algorithms that can be used for solving the resulting market clearing model. The paper uses this framework to compare zonal to nodal pricing in a realistic model of the Central Western European system. Our work arrives at quantitative estimates on the inefficiency of zonal pricing models relative to nodal pricing which amount to a few hundred million euro annually. The proposed modeling framework can be further extended in order to analyze the effect of zonal pricing on long-term investment, which is the topic of ongoing work in our group.
[1] I. Aravena, Q. Lete, A. Papavasiliou, Y. Smeers, Transmission Capacity Allocation in Zonal Electricity Markets, Operations Research, forthcoming