The question of whether Germany should be divided into one or more power price zones is certainly one of the most discussed issues in the energy sector at the moment. Our COO Christoph Gardlo comments on this energetic debate in the following blog article:
From our perspective, the most effective approach here is to take a pragmatic view of the situation and weigh the respective pros and cons of such a drastic reform—after all, things should be better after a reform than they were before. In particular, we have also weighed the question of whether this measure—in the current economic situation—post-COVID, economic crisis, and energy crisis—can or could actually provide relief for all consumers. To be clear from the outset: We do not believe that now is the right time to split the German electricity price zone.
Power price zones promise better utilisation of regional generation capacity
One of the main arguments in favor of introducing electricity price zones is that they better reflect regional generation capacity in conjunction with grid congestion. In theory, there should be no physical transmission bottlenecks within an electricity price zone—only then does an electricity price zone ultimately make sense. Regional electricity price zones could improve the utilization of renewable energy, as electricity generated by wind and solar power plants, for example, could be used directly within the respective price zone, and the price-lowering effect of renewables on the exchange electricity price would provide a financial incentive for local consumption. Given the lack of expansion in grid capacity and storage options, this could be a short-term solution to minimize bottlenecks. Viewed from this perspective, electricity price zones could increase the overall efficiency and cost-effectiveness of the electricity system.
Furthermore, the introduction of electricity price zones could further increase the incentive to expand renewable energy in regions with high electricity prices. Here, too, the incentive for further expansion would lie in the price-lowering effect that renewables have on the electricity price, since regions with a lower share of renewables in their generation would experience periods of high prices more frequently and—so the hope goes—would strive to reduce these by further expanding renewable generation capacity.
In our view, these arguments and assumptions are, in principle, reasonable and, for the most part, correct. However, they ignore the economic challenges Germany is currently facing and the time required to implement the division of electricity price zones and establish the necessary supporting measures.
The downsides of the power price zones
If Germany were divided into several electricity price zones, the north—with its wind energy—would have significantly lower electricity prices than the south, which has a high industrial load as well as a large amount of PV generation (Aurora Research assumes an increase of 5€/MWh (by 2030) in southern Germany. But what will the north do during periods of low wind, or the south when the sun isn’t shining? Many of the gas-fired power plants that provide residual load are not located in northern Germany. Flexibility, storage, and electrolysers are intended to provide the necessary balance. However, this first requires a significant expansion of these complementary measures. This expansion must be financed; the construction of storage facilities and electrolysers requires a business case; and on top of that come substantial requirements regarding permits and the actual construction time. Southern Germany would face the same problem when expanding an infrastructure to complement PV.
Apart from this, the creation of electricity price zones would make national trade more difficultThis could make it more difficult for industrial companies in particular to purchase electricity and reduce the spread and acceptance of PPAs complicate the situation. This would place an even greater burden on industry in southern Germany than it already is in Germany - relocation from the south to the north of Germany seems less likely to us than a complete exodus. If a new site is to be built on a greenfield site, it will probably be built where the production conditions are generally more favorable. Especially as the availability of green electricity alone is not enough. Most industrial processes have at least a minimum base load requirement that must be covered at all times. In order to guarantee the necessary security of supply, renewables are dependent on storage and flexible residual generation. This is where the cat bites its tail, as these systems do not yet exist. The time-consuming process of establishing these measures on an economic basis would, in our opinion, be extremely destructive for the German economy.
One solution favored by many to break this vicious cycle is industrial subsidies, such as the proposed subsidized industrial electricity rate. In this scenario, the government covers the difference between the fixed electricity price and the actual price. If Germany were to implement separate electricity price zones, the south—and thus the majority of those benefiting from the industrial electricity price—would structurally have to pay higher prices. Consequently, the costs of introducing the industrial electricity price would rise. In the north, on the other hand, surplus electricity from wind power would still not be able to be transmitted or put to good use, meaning that compensation payments for the redispatch of the plants would still be necessary. Redispatch requirements in the south might decrease somewhat „thanks“ to the higher price level. Whether the option of split electricity price zones would ultimately be cheaper or more expensive for the economy cannot be clearly determined. This requires a realistic estimate that takes all implications into account.
Finally, there is a risk that the expansion of renewable energy will stagnate in „low-price zones“ once plants are no longer built with subsidies funded by levies. This could lead to increased self-cannibalization and hinder the expansion of renewable energy overall.
Our conclusion: Upgrade the grid!
Given the already difficult economic situation, and for the reasons mentioned above, we oppose dividing the electricity pricing zone and advocate for further upgrading the entire system to support renewable energy by expanding storage capacity and flexibility. We also need a reform of grid fees, whereby we would favor solidarity over a further widening of zone price differences, as well as an acceleration of permitting processes and incentives for greater flexibility in the system. Furthermore, an electricity system based on renewables requires a European „think big“ approach rather than fragmentation into a „piecemeal“ approach.
One thing is also certain: the transformation of Germany’s electricity generation landscape—from fossil fuels to renewables—stands or falls on increasing flexibility and expanding the grid. Measures such as expanding storage capacity and implementing all technically feasible flexibility measures can quickly help relieve pressure on the power grid, but without further expansion of the power grid—including the European interconnected grid—the transition to predominantly renewable generation will not succeed at a reasonable cost. We would recommend distributing the costs of grid expansion equitably across all of Germany, just as we would the costs of redispatch—one cannot happen without the other.
