Zonal versus Nodal Electricity Pricing: the PJM experience

New podcast interview with Vincent P. Duane, Senior Vice-President at PJM

Today, in Europe electricity prices are determined per bidding zone which equals in most cases a country. Such an approach is called zonal pricing. Under zonal pricing, only transmission capacity limitations between the different zones are considered in the market-clearing process. The transmission lines within a zone are assumed to have unlimited capacity. This assumption is more and more challenged; one factor is the changing pattern of network flows due to the integration of renewables. As a result, so-called loop flows are occupying a significant proportion of the cross-zonal transmission capacity and less cross-zonal transmission capacity can be offered to the markets to allow for trading. In other words, Europe’s less-than-optimal zonal configuration is becoming a limiting factor for the efficiency of the market integration process.

One remedy could be to build more transmission lines. This option is however costly and takes a lot of time. Another remedy could be to redraw the boundaries of the different bidding zones, a so-called bidding zone review. In the extreme, the zones could be determined so small up to the point that each node of the transmission network is priced; this is nodal pricing. With nodal pricing, limitations on all transmission lines are considered in the market clearing process. Nodal pricing is advocated by many academics as being the theoretical optimal solution. However, many stakeholders in Europe are resisting against a push in the nodal direction.

On the 25th of January, the Florence School of Regulation held a workshop about zonal versus nodal pricing for the electricity markets. In the slipstream of the workshop, Tim Schittekatte interviewed Vincent P. Duane, Senior Vice-President at PJM. PJM stands for Pennsylvania-New Jersey-Maryland and is the largest independent power system operator (ISO) in the US. It operates competitive wholesale electricity markets and the power system serving an area encompassing 14 different states. Since about 20 years ago, nodal pricing is implemented in PJM.

In the interview, Tim questions Mr Duane about how PJM deals with some of the common ‘’European concerns’’ regarding a nodal electricity market: low liquidity, market power and computational complexity. Looking at the PJM experience, the challenge in switching from zonal to nodal pricing seems to be not really in the economics or technicalities but rather in governance. The interview ends with an outlook to the future. It is argued that if we really want a vision of local energy generation and smart consumption to materialize, we need local prices reflecting the correct value of the different attributes of electricity.

Seam Issues in electricity market integration, US vs EU

If you want to know more, please also take a look at the online debate ‘’Seam issues in electricity market integration, US vs EU’’ with Jean-Michel Glachant (Director at FSR), Daniel Dobbeni (former President of ENTSO-E) and Ross Baldick (Professor at the University of Texas at Austin). And the blog by Ross Baldick on the same topic.