Locational signals in electricity market design: Do they really matter?

Abstract

This study identifies potential electricity market design (EMD) approaches of sending Locational Signals (LS) that guide the location of generation plants. The stability, predictability and strength of LS from each approach are evaluated using cases from European electricity market. Additionally, important LS outside EMD are identified and compared against the signals from EMD. The paper concludes that LS from EMD do not always matter. Policy makers should be aware of the many factors influencing generation investments when setting up or changing an EMD and assess the potential of the envisaged incentives in relation with other incentives within and outside the EMD.