The recent economic crisis had a remarkable impact on the operation of the European electricity market: By causing a reduced industrial output of several European countries, it significantly lowered the electricity demand in parts of the network. Consequently, electricity import and export flows changed considerably all over Europe. Since the definition of transfer capacities between (national) market zones is based on traditional flow pattern, frequent reductions and redispatch measures became unavoidable to guarantee operational security. In the long run, however, the major driver to question the efficiency of today’s method of transmission capacity computation and allocation will be the increasing amount of variable renewable energies (such as wind power) connected to grid, required to reach the European climate targets.

This paper argues that European electricity market operation has to become more coherent with the actual network operation to remain economically efficient and operationally secure. Nodal pricing, known to be working in several liberalized electricity markets around the world, is proposed as the most promising approach. To study its efficiency on a European scale, a market model based on the full UCTE network and detailed generation data is introduced. Expected benefits and potential drawbacks are discussed.

The paper concludes that European electricity policy makers should consider nodal pricing not only to create a truly integrated and efficient European electricity market, but also to integrate variable renewable energies required to reach the European climate targets.