Local wholesale pricing is ‘essential’, insists ESO

National Grid Electricity System Operator (ESO) has strongly backed locational marginal pricing (LMP), in response to the government’s Review of Electricity Market Arrangements (REMA).

The ESO has stressed that breaking up the national wholesale electricity market to better reflect local power prices is essential to reflect the market’s future shape.

In its response, the ESO – which is due to form the basis for the Future Systems Operator – says the current wholesale market will not enable the delivery of net zero emissions because it cannot respond to real-time changes in weather patterns.

On days when there is plenty of renewable electricity and insufficient capacity to transport it to areas of high demand this often leads to generators being asked to turn off in bottlenecked areas to avoid overloading the system.

It claims improved locational pricing signals would incentivise flexible assets, such as batteries and industry, to soak up spare renewable electricity, thus reducing costs.

Of the two models for LMP, nodal and zoning pricing, the ESO backs the former, which is based on a larger number of nodes.

While pricing over larger zones would be preferable in today’s market, international experience suggests zonal markets suffer from gaming and it would be difficult to update zone boundaries as congestion patterns evolve, according to the ESO.

It says: “The right markets are required to address the locational value of electricity to reduce constraint costs on the system and maximise renewable generation capacity.”

Other responses to the committee call for reforms to the Contracts for Difference (CfD) scheme, which is also under the REMA microscope.

EDF said that making different low carbon technologies compete against one another for CfDs, while positive in terms of potentially cheaper bills for consumers, could have adverse impacts on system resilience if it narrows the types of generation awarded support.

The focus in the CfD process on awarding contracts on the basis of lowest cost could also reduce the geographic diversity of projects by pushing developers to undertake projects where it is windiest or grid capacity exists, potentially undermining the resilience of the overall system by increasing dependence on fewer areas.

EDF recommends that the government should review both the CfD scheme and the capacity market to encourage greater diversity of source, location and size of generation.