Congestion management by dispatch or re-dispatch: Flexibility costs and market power effects

Several European electricity spot markets use simplified methods such as uniform or zonal pricing. These methods only partly address congestion. Re-dispatch is then necessary to achieve a feasible flow. In the assessment of congestion methods we address congestion methods in both spot and re-dispatch markets. The paper first shows that simplified methods (e.g. uniform pricing) combined with re-dispatch, in theory can achieve the maximum optimal surplus of the nodal pricing method. This however only occurs under the assumptions of full participation in re-dispatch and no extra costs of readjustment. We show that violations of these assumptions, i.e. limited participation and extra costs of readjustment can make the spot and re-dispatch model of handling congestion inefficient compared to nodal pricing. Further, we show that when a strategic player operates in the spot and re-dispatch market model, the consequences of market power potentially may be more severe and difficult to detect.