Siting and Operating Incentives in Electrical Networks: A Study of Mispricing in Australia’s Zonal Market

Abstract

The incentives electricity generators face in investment and output decisions hinge on market design. Under zonal market designs, where profit-maximizing participants face a uniform regional price, achieving lowest-cost system-wide production can be impossible. Further, zonal designs can incentivize siting in inefficient locations behind network constraints. We develop measures of mispricing that compare the zonal prices generators receive to locational marginal prices that value congestion externalities from generator output. We apply these measures to show wind and solar generators are increasingly siting in constrained areas of the Australian network, and highlight sources of potential efficiency gains from adopting locational marginal pricing.