Compensation mechanisms to mitigate the market risk in offshore bidding zones

The latest European electricity market design reform introduced a compensation mechanism for wind producers located in offshore bidding zones. In this paper, we evaluate if and how much the mechanism covers the additional market risk introduced by offshore bidding zones. We discuss alternative implementations alongside previously proposed mechanisms. We evaluate the behavior of the various designs over a test network and across four scenarios built to describe the identified risks. We conclude that the adopted mechanism provides a better coverage than the designs that were proposed before the legislative process, but despite the improvements, it only addresses a part of the additional market risk introduced by offshore bidding zones. Furthermore, we note that its implementation requires a trade-off between simplicity and effectiveness. When combined with Contracts for Differences, the mechanism would shift some costs from the promoting countries to the countries whose Transmission System Operators are responsible for limiting cross-zonal trade. However, if the aim is to unlock a future market-driven development, a more extensive instrument might be needed in combination with Power Purchase Agreements.