Endogenous Price Zones and Investment Incentives in Electricity Markets: An Application of Multilevel Optimization With Graph Partitioning

45 Pages Posted: 16 Nov 2018 Last revised: 21 Jan 2020

See all articles by Mirjam Ambrosius

Mirjam Ambrosius

Friedrich-Alexander-Universität Erlangen-Nürnberg

Veronika Grimm

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - School of Business & Economics

Thomas Kleinert

Friedrich-Alexander-Universität Erlangen-Nürnberg

Frauke Liers

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Martin Schmidt

Trier University

Gregor Zöttl

Friedrich Alexander Universität Erlangen Nürnberg

Date Written: October 18, 2018

Abstract

In the course of the energy transition, load and supply centers are growing apart in electricity markets worldwide, rendering regional price signals even more important to provide adequate locational investment incentives. This paper focuses on electricity markets that operate under a zonal pricing market design. For a fixed number of zones, we endogenously derive the optimal configuration of price zones and available transfer capacities on a network in order to optimally govern investment and production decisions in the long run. In a multilevel mixed-integer nonlinear model that contains a graph partitioning problem on the first level, we determine welfare-maximizing price zones and available transfer capacities for a given electricity market and analyze their impact on market outcomes. Using a generalized Benders decomposition approach developed in Grimm et al. (2019) and a problem-tailored scenario clustering for reducing the input data size, we are able to solve the model to global optimality even for large instances. We apply the approach to the German electricity market as an example to examine the impact of optimal zoning on key performance indicators such as welfare, generation mix and locations, or electricity prices. It turns out that even for a small number of price zones, an optimal configuration of zones induces a welfare level that almost approaches the first best.

Keywords: Electricity Markets, Price Zones, Investment Incentives, Multilevel Optimization, Graph Partitioning

JEL Classification: C61, C63, C68, L11

Suggested Citation

Ambrosius, Mirjam and Grimm, Veronika and Kleinert, Thomas and Liers, Frauke and Schmidt, Martin and Zöttl, Gregor, Endogenous Price Zones and Investment Incentives in Electricity Markets: An Application of Multilevel Optimization With Graph Partitioning (October 18, 2018). Available at SSRN: https://ssrn.com/abstract=3271827 or http://dx.doi.org/10.2139/ssrn.3271827

Mirjam Ambrosius

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

Veronika Grimm

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - School of Business & Economics ( email )

Nuremburg
Germany

Thomas Kleinert

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Cauerstraße 11
Erlangen, 91058
Germany

HOME PAGE: http://https://www.mso.math.fau.de/edom/team/kleinert-thomas/thomas-kleinert/

Frauke Liers

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Schloßplatz 4
Erlangen, DE Bavaria 91054
Germany

Martin Schmidt (Contact Author)

Trier University ( email )

Trier, 54286
Germany

Gregor Zöttl

Friedrich Alexander Universität Erlangen Nürnberg ( email )

Nuremburg
Germany

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