In a move that could reshape the structure of Europe‘s electricity market, the European Network of Transmission System Operators for Electricity (ENTSO-E) has recommended dividing the current joint bidding zone of Germany and Luxembourg into five separate zones. This proposal is the result of an extensive Bidding Zone Review (BZR), aligned with regulatory frameworks set by the Agency for the Cooperation of Energy Regulators (ACER) and driven by the objective to enhance market efficiency and operational security.

The BZR, targeting implementation around 2025, involved a comprehensive assessment of alternative bidding zone configurations across 22 key criteria. These included not only economic efficiency, but also factors such as grid stability, renewable energy integration, market liquidity, transition costs, and the long-term robustness of the proposed changes.

Among the scenarios analysed, the configuration labelled DE5, which envisions splitting Germany and Luxembourg into five distinct zones, delivered the highest monetised benefit, estimated at 339 million euros annually. This gain primarily stems from a projected 50% reduction in redispatch costs, addressing one of the persistent challenges in managing internal grid congestion within the current market design.

High Transition Costs and Uncertain Payback Periods

Despite these potential gains, ENTSO-E highlights that the proposed reconfiguration would entail substantial transition costs, ranging between 1.269 billion and 2.378 billion euros. Such figures imply a minimum payback period of 4 to 9 years, contingent upon stable market dynamics and successful implementation.

The report stresses caution:
“Decisions of this magnitude require assurance that projected benefits will materialise within a reasonable timeframe, particularly given that much of the underlying data dates back to 2019 scenarios.”

Furthermore, ENTSO-E advises that any decision should account for upcoming grid expansions in Germany and evolving market conditions leading up to 2030, ensuring alignment with broader European energy objectives.

Market Liquidity, Transaction Costs and Industrial Impact

One of the most pressing concerns is the anticipated deterioration in market liquidity and the increase in transaction costs across all assessed configurations. Fragmenting the bidding zone could introduce new commercial borders, complicate cross-zonal trade, and pose challenges for industrial consumers who are reliant on predictable pricing mechanisms.

Additionally, the restructuring may hinder the development of Power Purchase Agreements (PPAs), particularly those linked to renewable energy projects, by creating barriers to accessing competitively priced electricity across newly defined zones.

Renewable Integration: Stability or Setback?

While the BZR indicates that short-term impacts on renewable energy integration and CO₂ emissions would be minimal, ENTSO-E raises concerns over the indirect effects on renewable investment signals.
“Reduced market revenues in lower-price zones could discourage future investments in critical sectors such as offshore wind,” the report warns, highlighting the delicate balance between market design and decarbonisation targets.

Expert Insights: Negative Prices, Structural Risks and Policy Gaps

The debate around bidding zone reconfiguration coincides with a broader challenge facing European electricity markets — the rise of negative prices. Experts point out that such pricing scenarios have become commonplace in countries like Germany, the Netherlands, and France over the past decade.

“Negative prices undermine incentives for new generation capacity and heighten operational risks for existing assets,” analysts note. While beneficial for consumers with indexed contracts, these trends expose vulnerabilities in market design.

To address these systemic issues, industry specialists advocate for comprehensive measures, including enhanced energy storage solutions, greater demand-side flexibility, targeted grid investments, and the establishment of local flexibility markets.

“The European Commission, particularly through DG ENER, must deliver stronger legislative frameworks. Directive (EU) 2024/1711 is a start, but it falls short of addressing the scale of these challenges,” they assert.

Strategic Outlook: Beyond Simulations

ENTSO-E concludes that while the DE5 configuration offers quantifiable benefits, the complexity of Europe’s energy landscape demands a holistic approach.
“Simulation results provide valuable insights but should not be the sole basis for transformative decisions,” the organisation emphasises, urging Member States to integrate regulatory, economic, and social considerations before endorsing any reconfiguration.

As Europe advances towards its Green Deal objectives, the balance between market efficiency, investment certainty, and energy transition goals will remain at the forefront of policy debates.