Balancing Market Efficiency and Incentives: Managing Redispatch Within Regulatory and Operational Limits

SUMMARY

Europe’s electricity markets face rising redispatch costs and operational stress, highlighted by the recent Spanish blackout. While structural reforms like nodal pricing and bidding zone redefinition are the long-term solution, immediate action can be taken to maintain efficiency and system security within regulatory limits.

This paper proposes a practical interim solution to deliver significant cost savings. This two-track approach—short-term operational improvement alongside long-term market reform—offers a clear path to balance market efficiency with grid stability.

Europe’s electricity markets are under growing pressure from increasing renewable integration, aging infrastructure, and delays in grid development. Grid operators are regularly forced to intervene after markets clear to maintain secure operations—most commonly through redispatch, which alone costs the EU estimated at EUR 10 billion per year.

The recent blackout in Spain, combined with record-high redispatch costs, has underscored just how urgent and visible these challenges have become. While long-term solutions must focus on aligning market structures with physical grid realities, interim strategies are needed to manage growing redispatch volumes without violating regulatory boundaries or distorting market signals.

Regulatory Framework: The Legal Boundaries of Redispatch

Redispatch is legally constrained in Europe. It is not a tool for market reoptimization, but rather a mechanism for ensuring system security exclusively:

• Article 13 of Regulation (EU) 2019/943 allows redispatch only for congestion relief and system security.
• TSOs are not mandated to perform market reoptimization, as this function is absent from Article 40, which defines their roles.
• Article 8(h) of the CACM Regulation requires TSOs to respect day-ahead and intraday market outcomes, unless changes are strictly necessary for system security.

Deviating from this legal framework risks undermining market integrity, reducing transparency, and opening TSOs to challenges over impartiality and market interference.

Market Reoptimization: What are the fundamental challenges

There is growing interest of using redispatch as a post-market efficiency tool—a practice known as market reoptimization. But this brings serious structural risks:

1. Erodes market credibility: If results can be revised post hoc, the market loses its role as a credible allocator of resources and guide for investment.
   2. Incentivizes withholding: Generators may prefer to be redispatched rather than participate in the day-ahead market, undermining market liquidity.
   3. Violates legal mandates: Any reoptimization beyond system security lacks a regulatory basis and risks legal and institutional conflict.

Possible Workaround: Introducing a market reoptimization threshold

While structural reform is the goal, short-term improvements are possible. A promising interim measure is the coordinated optimization of redispatch and non-costly actions where redispatch is penalized with a small market re-optimization threshold. A recent proof of concept conducted by Pharoes offers practical insights:

• Significant cost savings are possible: While not globally optimal, coordinated optimization performed markedly better than sequential approaches, with potential annual savings possibly exceeding hundred million.
• Penalty tuning allows offering a middle ground: Moderate penalties (e.g., 10 EUR/MWh) capture most of the theoretical benefit (~57%) while limiting redispatch growth, only increasing redispatch volumes by 15% compared to the case where redispatch is exclusively used to resolve congestion, the penalty could theoretically be reduced down further 

These findings were derived from a synthetic U.S. grid model adjusted to EU congestion levels, so while the quantitative estimates should be treated cautiously, the qualitative conclusions are robust but should be cross checked with real EU grid information.

Long-Term Solution: Structural Market Reform

Despite the value of coordinated remedial action optimization, this is not a substitute for structural reform. The root cause of high redispatch costs is the misalignment between market design and grid topology, and only deep structural changes can address this sustainably:

• Nodal pricing directly internalizes congestion costs into market prices and reduces the need for redispatch altogether.
• Smaller bidding zones offer a practical step toward locational pricing without the full complexity of nodal systems.

Both approaches offer regulatory clarity, align incentives across stakeholders, and preserve the integrity of market signals—crucial for long-term investment and decarbonization.

Conclusion: A Two-Track Approach for Europe’s Power System

To manage current redispatch challenges while preparing for a structurally efficient future, European TSOs and policymakers could pursue a two-track strategy:

1. 1. Short term: Consider the implementation of a coordinated optimization of redispatch and topology as a practical, legal, and effective workaround to manage redispatch volumes and reduce costs without compromising market integrity.
   2. Long term: Advance structural reforms such as nodal pricing or zone redefinition to realign market design with physical grid conditions and ensure enduring efficiency. This shall reduce the added value to be captured with the market reoptimization threshold but wont fully eliminate the benefits for it.

The recent Spanish blackout and increasing redispatch costs make this discussion more than theoretical. It’s a signal to act—carefully, strategically, and with a clear understanding of both regulatory constraints and operational opportunities.

About the authors 

This article was written by Diego Luca de Tena, Managing Director of Pharoes, who is based in Madrid. The author wants to thank Profesor Luis Olmos, for his clarifications on the fundamental limits towards market reoptimization.