Improvement of Zonal Pricing in Wholesale Electricity Markets (2020)

European day-ahead markets for electricity apply zonal pricing. Prices are then allowed to differ across zones because of network congestion, but are the same within each zone. In the real-time market, there can be price differences also within zones because of local bottlenecks. This paper proposes a new market design with the property that prices are the same within zones also in the real-time market. Simulations show that this design substantially would reduce problems associated with strategic behavior in the wholesale market arising from price manipulation between the day-ahead and real-time market.