Mitigating the Inc‐Dec Game in Zonal Electricity Markets

In Europe, differences in how the zonal day-ahead market and the system operator’s real-time market handle power system constraints, such as transmission capacity, voltage levels, and system stability, create opportunities for regulatory arbitrage (the inc-dec game). This increases consumer costs, heightens outage risks, and distorts investment signals. The paper uses a competitive equilibrium model with sequential rationality to analyse the problem and identify mitigation measures. Key solutions include procurement of critical system services, local grid tariffs, tighter rules for participation in the real-time market, and modest grid enhancements that relax binding system constraints. JEL Classification: C72, D47, L51, L94, Q48