Job advert confirms government stance on locational pricing

A job advert posted by the Department for Energy Security & Net Zero (DESNZ) confirms that the government is progressing plans for zonal pricing.

The job description for a ‘locational electricity markets policy design’ team leader refers to zonal pricing on seven occasions, confirming that the government will work alongside the future system operator and Ofgem to draw up plans.

It describes the development of zonal pricing proposals as “absolutely critical” for the future of the energy system, adding that the “results will be felt for decades to come”.

As part of its ongoing Review of Electricity Market Arrangements (REMA), the government is considering the introduction of locational power pricing, whereby wholesale prices would vary across a series of geographical zones or a larger number of nodes on the power grid.

As previously revealed by Utility Week, the government will rule out replacing the existing national wholesale market prices with nodal local marginal pricing (LMP) arrangements that more accurately reflect the costs of generating electricity in different parts of the country.

However, the government will back the development of zonal pricing when energy secretary Claire Coutinho unveils the latest stage of the long-delayed REMA on Tuesday (12 March).

The locational pricing team leader role comes with an annual salary of up to £73,000 and is described as “a top priority across government”.

Responsibilities listed in the job advert include:

• Work closely with the system operator, the regulator and industry to develop potential zonal GB wholesale designs and agree lead options to be considered as part of wider electricity market reform options.
• Work closely with analysts to build a strong evidence base on zonal benefits, costs and risks. Work with strategy colleagues to consider how decisions on zonal design impact wider policy such as spatial planning, investment and cross-border trading.
• Work closely with the parallel policy team developing national pricing models to ensure a consistent approach. Understand implementation pathways and impacts on different market participants to enable comparative analysis and assessment.
• Oversee work to assess possible impacts on both renewable and flexible asset investment, considering the interaction of renewable support mechanism reform with zonal designs, and how impacts on existing assets can be best managed.
• Work closely with the system operator on options to improve dispatch and develop understanding of BAU reforms needed for zonal e.g. changes to access, network charging, CM etc.
• Develop understanding of likely impacts of different zonal models on different types of end users and retailers.
• Support engagement plans to ensure the concerns of key stakeholders are factored into zonal design and decision making processes.

Supporters claim locational pricing could save tens of billions of pounds in constraint payments and network reinforcement costs by improving the efficiency the electricity system and incentivising the co-location of generation and demand. Critics argue that these benefits are overstated and that introduction of locational pricing would bring massive disruption and uncertainty for investors.

The job advert adds: “Your role will be to identify and work through the policy options to improve locational price signals for GB electricity markets – and then deliver them directly or through other policy teams in DESNZ.

“This means developing a deep understanding of current system features and future needs. It means unpacking and assessing existing ideas, developing new options where needed, and balancing the theoretically desirable with the art of the possible given the system we have in place today.

“Getting this right is absolutely critical, and the results will be felt for decades to come.”

As revealed by Utility Week earlier this week, Coutinho will also sound the death knell for market decoupling early next week when she unveils the latest stage of the long-delayed REMA.

Proponents of market decoupling claim that splitting the wholesale market in two would end the current situation where volatile gas prices effectively set the marginal price of electricity on the grid.

However, Utility Week has learnt that a new consultation paper will dismiss proposals for wholesale market decoupling, which were a cornerstone of the original REMA package.

DESNZ is understood to have concluded that many of the benefits of cheaper renewable power are already being delivered by capped Contracts for Difference (CFD), which are providing an increasingly large share of the UK’s electricity and are not governed by the wholesale market’s marginal pricing arrangements.