Local power pricing proposals spark fears over fairness

Introducing locational wholesale electricity prices would be simpler and potentially fairer if it were carried out on a zonal rather than a nodal basis, the government has been told.

In its response to the Department for Business, Energy and Industrial Strategy’s consultation on its mooted Review of Electricity Market Arrangements (REMA), the think tank Sustainability First explored proposals in the paper to introduce locational prices into the national wholesale market.

The idea behind the locational marginal pricing proposal is to provide the transmission system with stronger price-signals about what generation to operate and where best to site power plants and potentially even sources of demand, like factories. The BEIS consultation suggested locational pricing could either be introduced in a smaller number of regional zones or at a larger number of nodes on the transmission network.

However, Sustainability First warned that from the standpoint of end-users, locational pricing is “controversial” and “potentially also hugely complex”.

“For current individual consumers, regions and communities major questions of fairness arise if significant cost-penalties are to be introduced into retail tariffs for simply happening to be located in a ‘wrong’ place from the standpoint of the electricity system.”

Zonal pricing seems “simpler and more readily understood…especially with respect to demand’, the response said: “It is hard to see how the sheer complexity and/or likely post-code lottery of nodal pricing can be justified from an end-user standpoint, especially if nodal prices are to be applied to customer demand as well as to generation.”

It also said there are other effective ways for introducing stronger locational price signals into the electricity system, such as transmission and distribution network charges, which Sustainability First noted the consultation does not discuss.

More broadly, while welcoming BEIS proposals to reduce system costs by encouraging greater flexibility, the response said a move to “sharper” price-signals, such as during peak periods, will raise issues of fairness as they eventually pass through to end-users.

‘Winners, losers and significant distributional impacts will arise. In particular, questions will arise as to how far winners can expect to take the full benefit of their flexibility and/or how far all customers can expect to benefit from the more efficient system envisaged as a result of the different options and how these options in the end are packaged.”

The response said an assessment of whether outcomes for end-users are broadly “fair” or “equitable” should be added to the government’s list of criteria for assessing which REMA options to take forward, adding: “Major strategic decisions made in REMA over the next two to three years will shape basic end-user outcomes for the next 20 years.”