Impact of bidding zone re-configurations on electricity prices: Evidence from Sweden

In the European Union's electricity wholesale markets, energy is traded across large bidding zones, which, in most cases coincide with national borders: the so-called zonal markets. Within each market zone, energy flows are supposed to be free of transmission constraints. However, in some cases transmission constraints exist, implying an inefficient mismatch between demand and supply in different areas where the zonal market holds. Does transition to a more homogeneous multi-zonal market change equilibrium prices by facilitating a better balance between demand and supply when transmission constraints hold? We answer this question, by testing if the market re-configuration from one bidding zone to four zones, together with the commitment to not limit export with the neighboring countries, which took place in Sweden in November 2011, implied a change in prices. We perform a Regression Discontinuity in Time (RDiT) to compare change in prices in the four zones of Sweden. We find that, after November 2011, electricity prices increase across all zones with a stronger effect in SE3 and SE4 (southern Sweden). • The electricity market configuration can be zonal or nodal. • Transmission line constraints often create inefficiencies in large bidding zones. • In 2011, market re-configuration in Sweden divided the single bidding zone into four. • Dividing the market allows to have differentiated prices. • Zones with scarce supply relative to demand exhibit significantly higher prices.