Heavy Industries Go Light: The End of Uniform Electricity Prices Across Germany?27 November 2024

Background of the discussion

Whilst Germany’s energy-intensive industry is to a large extent based in its south and west, renewable energy production, especially regarding wind energy, largely takes place in the north. With substantial new offshore wind capacity to be added in coming years,  substantial grid expansion will be required to transport this energy to the south. If grid expansion measures are not in place, grid congestion will be the consequence.

Grid congestion is not only a national issue. Rather, EU law provides that “structural congestion” in its internal electricity market may lead to a separation of bidding zones for electricity trading at the electricity exchange. Currently, Germany has one single bidding zone, which also includes Luxembourg. Splitting the German electricity market into separate bidding zones would mean that Germany would no longer have uniform electricity market prices at a wholesale level. For energy-intensive companies in the south, that would be bad news.

Bidding zone review on EU level

In Germany, the discussion is mainly focussed on electricity flows and potential price differences within the country. EU law, however, is concerned with cross-border electricity flows and the effect that grid congestion might have on neighbouring member states due to ring-flows through their grids and limitations on cross-border trade. EU Regulation 2019/943 on the internal electricity market, as amended, in its section on network access and congestion management provides for a “bidding zone review”, (Art. 14). Art. 14 (1): “[…] Bidding zones shall not contain such structural congestions unless they have no impact on neighbouring bidding zones, or, as a temporary exemption, their impact on neighbouring bidding zones is mitigated through the use of remedial actions and those structural congestions do not lead to reductions of cross-zonal trading […]”.

In line with the Regulation, the Transmission System Operators (“TSOs”) of all bidding zone review regions, including Germany, currently perform a joint study on alternative bidding zone configurations. For Germany, this bidding zone review covers several alternative bidding zone scenarios, with two or even up to five separate bidding zones. These scenarios were set by ACER (the European Union Agency for the Cooperation of Energy Regulators) in its decision on the alternative bidding zone configurations to be considered in the bidding zone review process. The review, the methodology of which was also set by ACER, relates to several defined indicators grouped into the main categories of network security, market efficiency, stability and robustness of bidding zones and energy transition, all with regard to the target year 2025. In their report, the TSOs will provide a recommendation for each region on whether to keep the current bidding zone configuration or to adjust it.

The report considers the target year 2025, and important German grid expansion projects will not be in operation in that year. In the light of the continuing grid congestion expected in 2025, it seems possible that the report may recommend splitting the German market into two or more separate bidding zones. Stakeholders had the opportunity to provide their input by 4 September 2024, on the topics of market liquidity and transaction costs, transition costs, measures to mitigate negative impacts, and practical implementation considerations. The final report is expected by December 2024.

Decision making

In principle, the TSO report is not a binding instrument but a recommendation. Nor will it automatically lead to a split into two bidding zones.

However, structural congestion was already found in a report by the German TSOs in 2019, which was accepted by the regulator under Art. 14(7) of Regulation 2019/943. Consequently, Germany set up an action plan under Art. 15 of the Regulation, which requires certain measures be enacted until end of 2025. If the trajectory for annual increases of cross-zonal capacity is not followed, or a minimum level of 70% of available capacity for cross-zonal trade is not reached by end of 2025, Germany must decide, together with the other relevant member states, whether to retain the single bidding zone. If unanimity cannot be reached, the EU Commission, as a last resort and after consulting ACER and the relevant stakeholders, will adopt a decision whether to amend or maintain the bidding zone configuration in and between those member states.

Outlook

The national discussion needs to decide whether or not Germany wants to retain the single bidding zone – also taking into account that some federal states may have different views. However, in the light of EU rules, it will be important to convince the relevant neighbouring states to agree with Germany. Finally, in the event that no unanimous decision with the relevant member states can be reached in favour of the German position, there is the need to convince the EU Commission which will then have the final say. Accordingly, industry associations and other “influencers” first of all have to present convincing arguments on the national level but will also do well not to lose sight of the EU context.

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