The downside of power price zones

ESFORIN COO Christoph Gardlo comments on why they could do more harm than good in this blog article.

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 or 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 power price zone.

Power price zones promise better utilisation of regional generation capacity

One of the main justifications for the introduction of power price zones is the better mapping of regional generation capacity in connection with grid bottlenecks. In theory, there should be no physical transport bottlenecks within a power price zone – only then does a price zone ultimately make sense. Regional power 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 zone and the price-reducing effect of renewables on the exchange power price would incentivise local consumption in monetary terms. In view of the lack of expansion of grid capacities and storage options, this could be a short-term solution to minimise bottlenecks. From this perspective, power price zones could increase the efficiency and cost-effectiveness of the power system as a whole.

In addition, the introduction of power price zones could further incentivise the expansion of renewable energies in regions with high power prices. Here, too, the incentive for further expansion would lie in the price-reducing effect of renewables on the power price, as regions with a lower proportion of renewables in their generation would experience more frequent periods of high prices and, it is hoped, endeavour to reduce these through the further expansion of 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 power price zone division and establish the necessary accompanying measures.

 

The downsides of the power price zones

If Germany were divided into several power price zones, the north with its wind energy would have a significantly lower power 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 when the wind is low and 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 honourable requirements for approvals and the pure construction time on top of that. Southern Germany would have the same problem with the expansion of a PV-complementary infrastructure.

Apart from this, the creation of power price zones would make national trade more difficult. This could make it more difficult for industrial companies in particular to purchase power and complicate the dissemination and acceptance of PPAs. This would place an even greater burden on industry in the south of 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 favourable. Especially as the availability of green power 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 subsidised industrial power price. In this case, the national economy covers the difference between the fixed power price and the actual price. In the event of power price zone separation in Germany, the south and thus the majority of those benefiting from the industrial power price would have to pay structurally higher prices. Accordingly, the costs of introducing the industrial power price would rise. In the north, on the other hand, the surplus power from wind power would still not be able to be transported away or utilised 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. Whether the variant of split power price zones would ultimately be more favourable or more expensive for the economy cannot be clearly determined. 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 subsidised. This could lead to increased self-cannibalisation and hinder the expansion of renewable energies overall.

Our conclusion: upgrade the grid!

In the current already difficult economic situation, we are against a division of the power price zone for the aforementioned reasons and are in favour of further upgrading the entire system for a renewable system by expanding storage and flexibility. We also need a reform of the grid fees, although here too we would favour solidarity rather than a further tightening of zonal price differences, an acceleration of approval procedures and incentives for more flexibility in the system. Furthermore, a power system based on renewables needs a European "think big" rather than a disintegration into "small and small".

One thing is also certain: the transformation of the power generation landscape in Germany - away from fossil fuels and towards renewables – stands and falls with flexibilisation 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 power grid, but without the further expansion of the power 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.

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Carina Buchmann | Public Relations
+49.201.22038-164
carina.buchmann@esforin.com

ESFORIN SE

+49.201.22038-100
info@esforin.com
Ruhrallee 201 | 45136 Essen

We are happy to advise you

Carina Buchmann | Public Relations
+49.201.22038-164
carina.buchmann@esforin.com

ESFORIN SE | +49.201.22038-100 | info@esforin.com | Ruhrallee 201 | 45136 Essen

As specific as your need: Our answer

We are specialised in developing solutions customised to your personal requirements. And you can also righty expect this based on the information you receive from us.