Impact of wind energy on the European interconnections: Congestions, loop-flows and zonal pricing

Abstract

This paper investigates the implications of the substantial expansion of renewable energy sources, particularly wind power, on cross-border electricity trade in Europe. Employing Germany – a market with a high penetration of renewables – as a case study, the analysis demonstrates that during periods of high wind generation, Germany functions as a net exporter to all neighboring jurisdictions. Conversely, during periods of negligible wind injection, Germany reverts to a net importer position. This volatility is attributable, in part, to internal congestion within the German transmission system. In the absence of adequate infrastructure, this bottleneck results in the emergence of loop flows, which compromise network management in adjacent countries. Consequently, it is imperative to invest in domestic grid infrastructure within countries generating these loop flows, while simultaneously incentivizing renewable energy storage. This may be achieved through the reform of transmission and distribution network access tariffs. An alternative market design involves the implementation of zonal pricing (market splitting), as observed in the Nord Pool (e.g., Norway and Sweden), which would internalize congestion constraints. While the implementation of locational marginal pricing is often politically resisted in favor of uniform national pricing to ensure regional equity, the consequent socialization of congestion costs may induce spatial distortions and market inefficiencies.