Fighting the Wrong Battle
Why Europe Should Let the Grid Speak for Itself
A field can get trapped by its own metaphors. In European energy markets, the stubborn one is geographical. Policymakers have long treated entire countries as “copper plates”—flat surfaces where electricity can flow freely from any injection point to any withdrawal point without losses or bottlenecks. That simplifying assumption made sense when large power plants stood next to steel mills and transmission was mostly a short-haul affair. Today, with wind farms hundreds of kilometers offshore, solar arrays in sunny hinterlands, and demand still clustered in old industrial hearts, the grid looks less like a copper plate and more like an overloaded circulatory system—rigid in some arteries, dangerously pressurized in others.
This outdated picture lies at the heart of Europe’s zonal pricing system. A zone is typically a single country, and inside it electricity is assumed to move without friction. The day-ahead market clears on that basis, as though physical constraints were minor details. Electrons, of course, travel the path of least resistance, not the path drawn on a political map. The transmission network was never built to shuttle weather-dependent generation from one end of the continent to distant load centers without hitting limits.
The consequence is a costly, repetitive loop. Europe sets prices in a frictionless fantasy, then transmission operators step in after the fact with expensive redispatch—paying some plants to turn off and others to turn on just to keep the lights on. The market ignores physics when it sets prices, then spends billions correcting the error. Few people would design a process that way on purpose.
Over here in the Land of the Free, we abandoned that sequence years ago and switched to nodal pricing (more formally, Locational Marginal Pricing, or LMP). The idea is straightforward: every point on the network gets its own price, based on the actual cost of delivering one additional megawatt-hour there, given the real constraints. When lines are wide open, prices converge across wide areas. When they are congested, prices split apart. The market simply reflects what the grid is already telling us: location still matters.
Europe has been slow to follow a model that has been standard in most organized U.S. markets for two decades. Part of the hesitation is simple inertia, part is the appeal of a single uniform price across member states, and part is a set of familiar objections. European critics warn that nodal pricing would fracture liquidity, open the door to market power, and hurt industry in rural or peripheral regions. These concerns are sincerely held, yet experience on this side of the Atlantic shows they are largely manageable—and that the zonal system’s own flaws (hidden costs, distorted investment signals, massive redispatch bills) are growing harder to ignore.
The loudest worry is market power: split a country into hundreds or thousands of pricing nodes and a single generator in a constrained pocket could name its price. American regulators have heard that argument for years. In practice, the opposite often happens. Zonal pricing already creates gaming opportunities—the infamous “inc-dec” strategy, where plants in export-constrained areas bid low to get scheduled, knowing they will later be paid handsomely to shut down. Nodal pricing does not invent market power; it exposes it. Clear, location-specific prices let monitors see exactly who can withhold and apply automated mitigation rules. Under zonal pricing the regulator squints through fog; under nodal pricing the streetlights are on.
A second frequent objection is liquidity. Thousands of separate prices, the thinking goes, would splinter the market into tiny illiquid pools. That fear mixes up physical delivery with financial trading. In markets like PJM, MISO, or CAISO, almost all volume flows through liquid trading hubs—simple averages of many nodal prices. Participants then hedge the difference between the hub price and their specific location using financial transmission rights (FTRs) or other basis instruments. Far from being exotic, these tools turn congestion into a visible signal that guides batteries, demand response, and new transmission exactly where they are needed.
That clear signal matters enormously for flexibility. Some Europeans seem to believe nodal markets discourage storage and load shifting. U.S. experience shows the reverse. A battery makes money by charging cheap and discharging dear—across both time and place. Uniform zonal prices wash out the “place” part of the arbitrage opportunity. Nodal prices give volatility an address, so storage migrates to the pinch points and gets paid for relieving them. Much of Europe’s current push for separate “flexibility markets” and capacity payments is an attempt to manufacture artificially the same locational signals that nodal pricing provides for free.
Implementation would not be painless. Calculating continent-wide nodal prices in real time is computationally heavy, and Europe has layered on complexities—linear pricing mandates, block bids, intricate cross-border flow rules—that U.S. markets mostly avoided. Americans accept that some generator cost curves are lumpy, that prices can occasionally be negative or sky-high, and that small side payments (uplift) are sometimes required to keep the math honest. Those are engineering trade-offs, not fatal flaws. Europe could simplify its own algorithms long before switching pricing paradigms.
Then there’s optics. Politicians dislike maps that show neighbors paying sharply different prices for the same electrons. Yet forced uniformity is not fairness—it is just a way to hide who is subsidizing whom. Right now, consumers in uncongested parts of the continent quietly pay for redispatch caused by bottlenecks elsewhere. Nodal pricing would make those transfers explicit. Congestion revenue could be rebated to consumers, and genuinely vulnerable regions could receive targeted support decided openly in parliaments rather than buried in opaque redispatch bills.
The practical way forward is unglamorous. Create (or strengthen) an independent market operator with a clear mandate, model the actual network topology, define a handful of liquid trading hubs, and issue transparent hedging products. Modernize bidding rules to handle lumpy costs honestly. Most important, run a parallel shadow nodal market for a couple of years and publish the prices alongside the savings. Let people see the difference before they have to live with it.
The deepest obstacle is not technical; it is psychological. Zonal pricing has become part of national identity—changing it can feel like moving borders. Yet nodal pricing redraws no frontiers; it merely stops pretending that electrons observe them. Incumbents who profit from today’s opacity will resist fiercely, because transparency threatens the quiet rents they collect in the shadows.
Any market design should pass a simple test: does it tell participants what the physical world is actually like? Zonal pricing fails. It whispers a polite fiction, then spends billions papering over the contradiction. Nodal pricing passes. It shows exactly where the wires are tight, where new investment belongs, and where flexible resources earn their keep.
Europe does not need another decade of theoretical debate. The American laboratory—imperfect, varied across regions, but now many decades old—has already shown that the feared downsides of nodal pricing can be tamed with competent regulation. The real question is whether Europe wants a market that respects physics from the outset, or one that keeps paying to pretend physics does not apply. Experience suggests the first option is cheaper in the long run. Electrons have never been much for diplomacy, and we long ago stopped asking them to be.