Energy minister: Nodal pricing not ruled out forever

Energy minister Graham Stuart has indicated that the government has not completely closed the door on nodal pricing, despite ruling it out as an option during its Review of Electricity Market Arrangements (REMA).

Stuart said that nodal electricity prices have not been ruled out “forever” and some form of locational pricing “makes sense”, when speaking at Aurora’s spring forum.

The government ruled out replacing the existing wholesale market with one based on a plethora of local nodes in its latest REMA consultation paper published just over a fortnight ago.

However, it kept a move to introduce pricing based on larger zones on the table alongside tweaking the existing one-size-fits-all pricing system.

Stuart told the conference that nodal pricing had been ruled out as part of the REMA exercise because of “the complexity and uncertainty” such a reform would entail for investors. However he stressed that this would “not necessarily [be] forever”.

While the government has yet to decide on whether to pursue zonal pricing, Graham said it is “really important to have the right locational price in principle”.

He added: “It just makes sense to send price signals, if you can do so without overcomplicating your market, and get generation closer to areas of demand and minimise the network, which is the key facilitating piece of infrastructure.”

The energy minister also said that expanding the grid to cope with increased generation and demand for electricity is the “number one barrier” facing the Department for Energy Security and Net Zero.

Stuart also said that he is looking forward to attending the decommissioning of the UK’s last coal fired power station in Nottinghamshire in September and defended the REMA announcement that new gas-fired plants will be needed before 2035.

Greg Jackson, Octopus Energy chief executive, said later at the event that the existing electricity market doesn’t offer sufficient locational pricing signals.

Pointing to how grid capacity shortages mean data centre developments that have been put on hold in the south east of England may relocate to other areas if they can get a lower price of electricity, he said: “It’s s a lot easier to build fibre to Scotland than to build the grid infrastructure.

“Power generation was located close to coal and we’re no longer giving industry electricity price signals to be close to where cheap electricity is.”

However Alice Delahunty, National Grid UK electricity transmission president, said that greater variation in electricity prices across Great Britain would not eliminate the need for network upgrades.

She said: “We’ve always been in favour of some locational signals. If you get locational signals right, it does reduce the need for infrastructure but when you fundamentally need to change the configuration of the grid from one optimised around coal to one optimised around coastal energy resources, there’s no getting away from the need to build infrastructure.”

Adding that it was not important to “create uncertainty for the sake of it”, Delahunty said: “We were pleased to see that nodal pricing was put to one side because that will take a long time to play out and create an enormous amount of uncertainty in that time.”

Nick Winser, the government’s ex-Electricity Network Commissioner, said that while zonal pricing is talked about like “it’s just been invented”, the wholesale market has contained such elements for more than 30 years.