How does grid congestion affect energy supply in Europe?

What is grid congestion, and why is it rising?

Grid congestion happens when the transmission system cannot deliver all the electricity generated to demand areas because of network limitations. This gap between generation capacity and network ability causes either curtailment or expensive redispatch efforts to keep the system balanced.

There are different forms of congestion:

• Structural congestion: caused by limited transfer capacity in the grid, often occurring where renewable build-out exceeds reinforcements.

• Temporary congestion: caused by outages, maintenance, or weather-related peaks in generation and demand.

The swift rollout of remote wind and solar power is a key factor. Regions like northern Germany, Spain, and parts of Eastern Europe show how renewable energy expansion has exceeded grid capacity, leading to substantial curtailment.

Congestion also has a cross-border aspect. Loop flows, interconnector constraints, and market coupling inefficiencies can cause bottlenecks in one country to affect neighbouring ones. Metrics like curtailment volumes, redispatch costs, congestion rents, and price spreads at zonal or nodal levels serve as indicators of the problem's extent.

As electrification and renewable penetration increase, congestion is likely to become more frequent and costly unless managed by targeted investments and smarter operational tools.

How congestion affects supply, prices, and system operations

The impacts of congestion go far beyond individual renewable projects. It influences energy supply, price formation, and overall system operations.

• Generation impacts: wind and solar plants are more at risk of curtailment, which decreases their capture prices and increases their imbalance exposure. Plants in constrained zones often see their actual revenues differ significantly from market hub prices.

• Supply security: ironically, congestion can cause local scarcity and ramping difficulties even when the broader system has surplus generation. This mismatch between national and local conditions undermines the security of supply.

• Price formation: In congested exporting zones, oversupply drives prices down to zero or into negative values. Conversely, in importing zones, scarcity pricing occurs, especially in intraday markets, leading to increased volatility.

• System costs: transmission system operators (TSOs) are compelled to intervene through redispatch and countertrading, both of which are costly. These expenses ultimately pass on to consumers via uplift charges or higher network tariffs.

• Cross-border effects: limited interconnectors decrease market efficiency and weaken hedging opportunities, especially during stress events when interconnection value is at its peak.

Overall, congestion reduces efficiency, raises volatility, and adds new operational complexities for system operators and market participants.

Commercial implications for market participants

Congestion significantly impacts commercial activities throughout the entire energy value chain. For example:

• Generators: face reduced project economics due to curtailment risk and revenue cannibalisation. Basis risk between hub prices and on-site capture prices makes forecasting more complicated, while offtake arrangements during constraints dictate which assets have priority.

• Suppliers and traders: hedging strategies become more intricate in congested systems, with shape and profile risk heightened by intraday volatility. Procurement strategies are increasingly designed to be congestion-aware, considering locational spreads.

• PPAs and contracts: congestion creates basis risk that can weaken traditional PPA frameworks. To improve alignment incentives, newer contracts often feature floor or collar mechanisms, basis adjustments, or curtailment clauses.

• Storage and flexibility providers:, such as batteries and demand-side resources, benefit from arbitrage opportunities driven by price spreads. They can also offer congestion relief services and gain extra value when co-located with renewables.

• Siting and permitting decisions: involve a trade-off for developers between locations that offer high renewable yields and the risks associated with grid access. Conducting early interconnection studies and congestion forecasts is increasingly important for supporting investment decisions.

In brief, congestion has shifted from a minor technical aspect to a core factor in project finance, contract structuring, and trading strategies.

Solutions: technology, market design, and policy levers

While congestion poses real risks, a combination of technological, market, and policy responses can lessen its impact and even transform it into an opportunity.

• Grid reinforcement and digitalisation are both important: constructing new lines is still necessary, but digital solutions can enhance the capacity of existing networks. Techniques like dynamic line rating, topology optimisation, and grid-forming inverters help increase utilisation and resilience.

• Flexibility procurement: storage, demand response, and electrolysers can be directed at congested nodes to offer local balancing and minimise curtailment. Procurement frameworks should effectively incentivise these assets.

• Market signals: implementing locational pricing or improving imbalance price signals can better reflect local constraints. Enhanced intraday liquidity also enables participants to respond more flexibly to congestion.

• Operational measures: include TSOs refining redispatch protocols, enhancing tools to minimise curtailment, and improving transparency in data releases, which helps market actors better anticipate constraints.

• Investment frameworks: faster permitting for grid reinforcements, proactive investment in transmission, and better coordinated cross-border planning are all necessary to align infrastructure with renewable expansion.

These solutions emphasise that congestion is more than just a technical issue; it is a broader system design challenge requiring coordination across policy, markets, and technology.

Conclusion

Grid congestion has become a critical aspect of Europe’s energy transition. It affects the amount of renewable energy that can be transmitted, influences price formation, increases system costs, and complicates investment decisions. For generators, suppliers, traders, and consumers, congestion risk now considerably impacts revenues and market exposure.

Constraints can create opportunities. Participants who accurately model grid risk, use adaptable assets, and establish congestion-aware contracts may gain a competitive edge. With the right policies, strategic siting, and enhanced market design, congestion can shift from a barrier to an engine of efficiency, innovation, and value generation.

As Europe progresses towards a decarbonised power system, congestion management will be a vital factor in ensuring the transition is smooth and cost-effective.