Where to build renewables in Europe? The benefits of locational auction design

Abstract

The European Commission recently proposed a 90 % carbon emissions reduction target for the year 2040. Reaching this target will largely rely on decarbonizing the power sector through the deployment of variable renewables through auctions. At the same time, redispatch volumes across the European Union are forecast to increase massively in the context of uncoordinated renewable deployment.

Against this background, we investigate the benefits that can be achieved with locational auctions for renewable capacity, taking into consideration the grid topology in the auction clearing mechanism. We contrast the outcome against a zonal auction mechanism, as well as an equal distribution scenario, which describes a very even distribution of renewable capacity.

We find that across all investigated scenarios, locational auctions maximize renewable integration, while minimizing the cost to consumers. In addition, they consistently lead to lower redispatch volumes than zonal auctions. Redispatch, however, is minimal in the equal distribution scenario, due to the high shares of local consumption. We thus conclude that maximizing system benefit stands in conflict with minimizing redispatch in zonal markets. While the former relies on maximizing renewable production, taking grid constraints into consideration, the latter objective benefits from maximizing local consumption and minimizing strain on the grid.