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Evaluation of Risks for Electricity Generation Companies through Reconfiguration of Bidding Zones in Extended Central Western Europe

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In Central Western Europe, a reconfiguration of bidding zones for electricity is frequently discussed as a way to improve congestion management. The current EU guideline on Capacity Allocation and Congestion Management even envisages reviews of the bidding zone configuration (BZC) in regular intervals of three years. Such a change of BZCs gives rise to additional regulatory risk for generation companies. Their expected net present value depends on local prices, which are directly influenced by the BZC. The paper at hand develops a methodology to investigate the impact of this regulatory risk. Therefore the risk of bidding zone changes is modeled using a partly-meshed scenario tree. The risk factors reflected therein are uncertainties in grid developments, in combination with other risks such as changing coal and gas spreads, demand, or renewable infeed variations. Results are compared to the current BZC in Europe and to a nodal setup.

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Keywords: Electricity Market Design, Bidding Zone Configuration, Investment Decisions, Risks

DOI: 10.5547/01956574.40.SI1.cdei

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Published in Volume 40, The New Era of Energy Transition of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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