The energy transition is straining legacy electricity market designs, prompting policymakers to consider pricing and other reforms. This research evaluated whether switching from uniform to zonal electricity pricing improves the efficiency of generation investment and siting decisions. Using an agent-based model calibrated to the Electric Reliability Council of Texas (ERCOT) power market, we ran long-term market simulations under alternative pricing structures to compare their resulting investment outcomes.
Results indicate that locational pricing directs investment toward high-demand, capacity-constrained zones and away from oversupplied regions, whereas uniform pricing distributes capacity more evenly but less efficiently. These findings suggest that, in the long term, locational pricing can mitigate transmission congestion and reduce the need for costly grid expansion.
These insights are directly relevant to policy debates in the European Union and United Kingdom, and they demonstrate the value of agent-based approaches for assessing how electricity market design shapes investment. Unlike traditional optimization models that impose system-wide objectives, agent-based models simulate investor decision making from the bottom up, capturing the diverse considerations that shape real-world power market investment decisions.
