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:
In our view, a pragmatic view of the situation and a weighing up of the respective advantages and disadvantages of such a drastic reform is the most expedient approach here - after all, things should be better after a reform than before. In particular, we have also weighed up the question of whether this measure can/could actually provide relief for all consumers in the current economic situation - post-corona, economic crisis, energy crisis. To anticipate this: We do not believe that now is the right time to divide the German electricity price zone.
Power price zones promise better utilisation of regional generation capacity
One of the main reasons for introducing electricity price zones is to better reflect regional generation capacity in connection with grid bottlenecks. In theory, there should be no physical transportation bottlenecks within an electricity price zone - only then does an electricity price zone ultimately make sense. Regional electricity price zones could improve the use of renewable energies, as the generation of wind and solar power plants, for example, would be used directly within the respective electricity price zone and the price-reducing effect of renewables on the exchange electricity price would provide a monetary incentive for local consumption. In view of the lack of expansion of grid capacities and storage options, this could be a short-term solution to minimize bottlenecks. From this perspective, electricity price zones could increase the efficiency and cost-effectiveness of the electricity system as a whole.
In addition, the introduction of electricity price zones could further increase the incentive to expand renewable energies in regions with high electricity prices. Here too, the incentive for further expansion would lie in the price-reducing effect of renewables on the electricity price, as regions with a lower proportion of renewables in their generation would experience more frequent periods of high prices and, it is hoped, would endeavor to reduce these by further expanding renewable generation plants.
In our view, these arguments and assumptions are understandable in principle and, to a large extent, correct. However, they ignore the economic adversities that Germany is currently facing and the time required to implement the electricity price zone division and establish the necessary accompanying 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 a significantly lower electricity price level than the south of Germany, which has a lot of industrial load as well as a lot of PV generation (Aurora Research assumes a plus of €5/MWh (2030) in the south of Germany). But what does the north do in times of low wind or the south when the sun is not shining? Many of the gas-fired power plants that provide residual load are not located in the north of Germany. Flexibility, storage and electrolysers are supposed to provide the balance. However, a considerable expansion of these complementary measures is required first. This expansion needs to be financed, the construction of storage facilities and electrolysers needs a business case, and then there are the considerable requirements for approvals and the pure construction time on top of that. Southern Germany would have the same problem with the expansion of complementary PV infrastructure.
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 to this vicious circle favoured by many is industrial subsidies, such as the proposed subsidized industrial electricity price. In this case, the national economy covers the difference between the fixed electricity price and the actual price. In the event of electricity price zone separation in Germany, the south and thus the majority of those benefiting from the industrial electricity price would have to pay structurally higher prices. Accordingly, the costs of introducing the industrial electricity price would rise. In the north, on the other hand, the surplus electricity from wind power would still not be able to be transported away or used sensibly, meaning that there would still be compensation payments for the redispatch of the plants. The redispatch requirements in the south would possibly decrease somewhat "thanks" to the higher price level. It is not possible to clearly determine whether the variant of split electricity price zones would ultimately be cheaper or more expensive for the economy. A realistic estimate is required here, taking all implications into account.
Finally, there is a risk that the expansion of renewable energies in "low price zones" will stagnate as soon as the plants are no longer built with levy support. This could lead to increased self-cannibalization and hinder the expansion of renewable energies overall.
Our conclusion: upgrade the network!
In the current already difficult economic situation, we are against a division of the electricity price zone for the aforementioned reasons and advocate further upgrading the entire system for a renewable system by expanding storage and flexibility. We also need a reform of grid fees, although here too we would prefer solidarity rather than a further tightening of zonal price differences, an acceleration of approval procedures and incentives for more flexibility in the system. Furthermore, an electricity system based on renewables needs a European "think big" rather than a disintegration into a "small-small" system.
One thing is also certain: the transformation of the electricity generation landscape in Germany - away from fossil fuels and towards renewables - stands and falls with flexibilization and grid expansion. Measures such as the expansion of storage facilities and the development of all technically possible flexibility measures can quickly help to relieve the pressure on the electricity grid, but without the further expansion of the electricity grid, including the European interconnected grid, the switch to predominantly renewable generation will not succeed at a reasonable cost. We would recommend distributing the costs for grid expansion across the whole of Germany in a spirit of solidarity, as well as the costs for redispatch - one is not possible without the other.
