Europe’s Challenge: A Smart Power Market at the Centre of a Smart Grid

This report by the Climate Policy Initiative argues that Europe's current power market designs are insufficient to support the transition to a low-carbon energy system and the goals of a smart grid. It advocates for a transition from zonal pricing and market coupling toward an integrated power market based on locational marginal pricing (nodal pricing), citing the US experience as a successful model for managing transmission constraints and integrating intermittent renewable energy.

• The current European system for managing congestion suffers from three primary inefficiencies: internal national inefficiencies where the market fails to communicate the value of generation at different locations; international inefficiencies where cross-border transmission is treated separately from domestic dispatch; and dynamic management inefficiencies where transmission capacity is determined too far in advance of real time.
• To effectively integrate wind power, market designs must satisfy six criteria: facilitating system-wide intraday adjustments, allowing joint provision of energy and balancing services, managing power across multiple hours, capturing international integration benefits, integrating demand-side response, and monitoring market power. The report states that no current European power market design meets all six, whereas nodal pricing can.
• Modeling based on the ENTSO-E database indicates that a nodal pricing system would outperform an optimized zonal pricing approach by increasing international transfers between countries by up to 34% and reducing annual system marginal costs by between €0.8 billion and €2.0 billion (an average of 1.1% to 3.6% of operational costs). Additionally, weighted marginal prices would be lower in 60% to 75% of EU countries under nodal pricing.
• While market coupling and the incorporation of international loop-flows provide some improvements, they fail to address congestion within zones and do not facilitate the system-wide intraday redispatch necessary for wind energy. The report notes that the US abandoned zonal pricing in Texas and California due to chronic intrazonal transmission capacity problems.
• An integrated power market managed by an Independent System Operator (ISO) offers three main advantages over the EU model: full information-sharing to avoid black-outs, pricing that reflects actual transmission constraints rather than TSO approximations, and the incorporation of generation constraints (such as start-up costs and ramp-times) into dispatch decisions.
• Transitioning to an integrated market faces resistance from various stakeholders. TSOs may be reluctant due to vertical integration or a preference for building new lines over efficient use of existing ones; conventional generators may fear increased competition; and power exchanges may oppose systems that limit their intraday activity. However, the report suggests that financial transmission rights can compensate generators in exporting regions who might otherwise lose revenue.

APA

Neuhoff, K. (2011). Europe’s Challenge: A Smart Power Market at the Centre of a Smart Grid. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2011/12/Smart-Power-Market-Project-Overview.pdf

Chicago

Neuhoff, Karsten. Europe’s Challenge: A Smart Power Market at the Centre of a Smart Grid. Climate Policy Initiative, 2011. https://www.climatepolicyinitiative.org/wp-content/uploads/2011/12/Smart-Power-Market-Project-Overview.pdf.

Wikipedia

{{cite report |last1=Neuhoff |first1=Karsten |title=Europe’s Challenge: A Smart Power Market at the Centre of a Smart Grid |publisher=Climate Policy Initiative |date=January 2011 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2011/12/Smart-Power-Market-Project-Overview.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{neuhoff2011europes, author = {Neuhoff, Karsten}, title = {{Europe’s Challenge: A Smart Power Market at the Centre of a Smart Grid}}, institution = {Climate Policy Initiative}, year = {2011}, month = jan, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2011/12/Smart-Power-Market-Project-Overview.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }