Liquidity in Intraday Markets for Electricity: An Empirical Analysis of the Swedish Bidding Area Reform

Abstract: Congestion in electricity networks is a crucial challenge for European electricity markets, as the continent is moving towards an integrated, decarbonized power system. One potential solution to this problem is a zonal pricing approach, which divides large bidding areas into smaller zones. While this approach reduces congestion by taking into account a larger share of network constraints, it is criticized for reducing market efficiency due to smaller market size. This paper empirically analyzes the trade-off between congestion costs and market efficiency using the Swedish bidding area reform in 2011 as a natural experiment. A fixed effects estimation strategy is employed to test the effect of the reform on liquidity in the intraday market ELBAS. We find that the bidding area reform did not have a consistent effect on liquidity in the Swedish intraday market. Thus, this study could serve as encouraging evidence for the use of bidding area reconfiguration as a congestion management tool.