Local wholesale pricing is ‘big risk’ for investment

Breaking up the electricity grid into a system of local mini-wholesale markets is a “big risk” and could jeopardise investment in low-carbon generation, MPs have been warned.

In an evidence session held on Tuesday (1 November) for the business, energy and industrial strategy (BEIS) committee’s inquiry into the decarbonisation of power, industry experts were quizzed on government proposals to replace the existing national wholesale market with location-based pricing for electricity.

Advocates of locational market pricing (LMP), which the government is consulting on as part its wider Review of Electricity Market Arrangements, argue that it leads to more efficient use of the grid by encouraging users to locate in areas where power is relatively cheap.

But Dr David Joffe, head of net zero at the Climate Change Committee, cautioned the committee against a radical reform of the wholesale market.

While the existing wholesale market is “not perfect”, the “most sensible solution” is to “tweak the bits that are not working well”, he said: “It is really important that we don’t rip up the system and start again. A huge amount of investment is required this decade and changing the rules quite dramatically could endanger it.

“Moving wholesale to location-based pricing feels like a big risk at this stage. It is something we should keep on the table but at the moment we don’t understand well enough how it will play out.”

Dan McGrail, chief executive of RenewableUK, said he was “unconvinced” that LMP would help to deliver the huge sums of investment the UK requires to meet its low-carbon energy targets.

He said the more “volatile” price signals, which LMP could create, would be a “barrier to investment” and increase the cost of capital for renewables developers.

In addition, McGrail said that that LMP can do nothing to influence the location of renewable energy generation because this is dictated by physical factors, such as the areas of seabed being leased by the Crown Estate.

“Sending signals based on location won’t change that reality,” he said.

Tom Glover, UK country chair of RWE, said that nodal pricing had increased the cost of capital by 100 to 150 basis points where it had been introduced in Texas, where he had run the company’s assets.

The introduction of LMP may encourage the construction of “slightly less” onshore wind in Scotland and “slightly more” solar power in England, he said: “That seems the only change you are going to see, and it is a very complicated mechanism to achieve that.”

Glover also said RWE has “no plans” to mothball its gas plants by 2035, the government’s target date for decarbonising electricity generation, but expected a proportion of the fleet to be running for “very low hours” in order to supply power during times of acute peak demand.

Robert Buckley, head of relationship development at consultancy Cornwall Insight, told the committee that the government’s legislation to cap renewable generators’ revenues had given a “jolt” to investors’ views of the UK low carbon sector because it had “redefined the rules” for existing projects.

James Richardson, chief economist of the National Infrastructure Commission, said that the government needs to “unpause” its Energy Security Bill, which was put on hold during Liz Truss’ record short tenure as prime minister but contains a number of key reforms for decarbonising the power sector.

He also said that nuclear power will only play a “fairly small role” in decarbonising power by 2035 because only two new plants at most can delivered by then.

But Richardson said that while building a whole fleet may be “a mistake” because it would involve “locking into a very expensive technology”, it would not be possible to recreate industry supply chains if the nuclear option is taken “completely off the table”.

Richard Arnold, policy director at the Marine Energy Council, said that tidal stream power will be “cheaper” than nuclear by 2035 with generation costs falling further to around £50/MW hour by 2050.