Government signals caution on local wholesale power prices

The government has signalled that it doesn’t want reform of the wholesale electricity prices, such as by creating a patchwork of local markets, to undermine investment in renewables.

Its response to the now defunct BEIS (business, energy and industrial strategy) committee’s report on decarbonisation of the power sector, confirms that the government wants to significantly narrow the options when it publishes the second consultation on its Review of Electricity Market Arrangements (REMA) this autumn.

This exercise, which follows an initial consultation on last year’s wholesale market reforms, will identify lead options where achievable and focus on a “handful [of] foundational policy areas and their interactions”, it says.

One of the more controversial ideas in last year’s paper was to allow more locational pricing to better reflect the varying costs of generating and distributing electricity in different parts of the county, instead of the current one-size-fits-all arrangement.

Advocates of locational marginal pricing (LMP), such as the National Grid Electricity System Operator, argue that it would give incentives to locate activity in places like northern Scotland where wind energy is abundant but transmission links are poor.

However critics of LMP argue that breaking up the market could undermine investor confidence in the power sector by introducing greater uncertainty into future revenues, while also failing to recognise that the location of renewable energy is largely dictated by physical factors.

The response, which has been issued by the Department for Energy Security and Net Zero (DESNZ) following the abolition of BEIS earlier this year, says it continues to explore and develop a range of options for sending ‘more efficient locational signals to incentivise generation and demand to locate in more suitable parts of the network and operate more efficiently to lower system costs, and ultimately costs for consumers’.

These options “include but are not limited” to locational marginal pricing, it adds.

The committee’s recommendations include calling on the government to weigh the benefits of greater pricing granularity against the level of market disruption it would cause and whether other mechanisms can achieve similar outcomes.

Responding to these concerns, the response says: “The department recognises that some kinds of generation, particularly renewables, can only locate in certain places, such as where it is windy or sunny, and it will ensure that the case for investing in these kinds of generation is not unduly affected by any options it takes forward.”

The response also rejects the committee’s call for a UK-wide target for onshore wind power by arguing that it would undermine the need to allow for local decision-making flexibility.

Reacting to the government response, the BEIS committee’s ex-chair Darren Jones MP said: “The UK must radically speed up the delivery of new energy infrastructure if we’re going to meet our net zero targets. Our report highlighted many ways in which the government could help do this. Yet ministers have rejected most of them. Consultations are not good enough in themselves. The Prime Minister created a new Department for Energy Security and Net Zero to get this right, but nothing seems to have changed

“Parliament, via many committee reports, has repeatedly asked the government to take action on our highest priority decarbonisation challenges: buildings, transport and industry. Yet once again we see ministers failing to fix the energy efficiency schemes, failing to speed up the delivery of onshore wind and failing to get a grip of industrial decarbonisation.”

The scrutiny of DESNZ has transferred to a new committee which will begin its first inquiries in the autumn.

One of the key factors driving REMA is the government’s desire to break the link between wholesale electricity prices, which currently tend to be set by the marginal cost of gas-fired generation, and cheaper renewable sources of power.