Regen opposes calls for locational power pricing

Regen has pushed back against calls for the introduction of locational wholesale power pricing, arguing this would not provide effective price signals for investment decisions and would significantly increase investment risk.

The non-profit consultancy said locational price signals should instead be provided by Transmission Network Use of System (TNUoS) charges, which should be reformed to make them more stable, predictable and cost-reflective.

In its response to the government’s Review of Electricity Market Arrangements (REMA), Regen called for “radical evolution” of the electricity system and markets, warning that a “single big-bang change” would be “high risk, cause an investment hiatus and may be impossible to deliver”.

“There has been a tendency for some commentators and industry influencers to make general statements that the current market is broken or not fit for purpose,” it explained.

“Whilst agreeing that the current market arrangements require reform, and in some areas significant change, we do not see evidence the current arrangements are so far broken as to require a complete market restructure.

“In part, we feel that the tendency to propose complex theoretical market concepts, such as a shift to locational marginal pricing, stems from a lack of understanding of how the current GB market operates and a failure to identify the underlying cost drivers or causes of market inefficiency.

“There has been a tendency to skew the benefit case for change by taking a worst-case counterfactual – ignoring the potential for improvements within the existing arrangement, many of which are already in progress, and taking a rose tinted view of a future theoretical arrangement.”

Regen said the case for shifting to a nodal or zonal pricing has been made on the basis that the lack of effective locational price signals has led to rising constraint management costs due to the sub-optimal location of renewable energy projects.

However, the consultancy said this is instead the result of delays in network investment and a reliance on large and inflexible gas generators to provide balancing services. It said these issues would be better addressed by reforming TNUoS charges; tackling delays in network investment, including examining how it is planned and delivered; and considering how National Grid Electricity System Operator (ESO) can reduce constraint management costs by improving control room functions and making greater use of flexibility assets and services.

In general, Regen said electricity market reforms should be aligned with the development of an overarching Net Zero and Energy Security Delivery plan. It said this plan include an overarching system architecture, which indicates the capacity of key technology types such as generation, flexibility and interconnection, with a breakdown at the regional level.

This plan should be supported with the wider reform of planning to ensure network, generation and flexible energy assets can receive approval in appropriate timescales. It should also be backed up by the accelerated build-out of transmission and distribution network capacity, perhaps using a holistic network design approach to determine what capacity will be needed in ten to twenty years’ time.

With regards to the wholesale power market, Regen said the government should increase the proportion of energy that is supplied on the basis of long-term contracts, including both Contracts for Difference and power purchase agreements, whilst maintaining appropriate marginal cost price signals to ensure optimal energy usage and flexibility. It said the government should explore the idea of a “green power pool” – a separate market for renewables with low-marginal costs, which would allow them to give up some potential upside value in exchange for long-term price certainty.

It said the government should ensure that dispatchable low-carbon generators, for example, those with carbon capture and storage or fuelled by hydrogen, are responsive to the market price and do not become baseload generators that crowd out lower cost and lower carbon renewables.

Furthermore, Regen said the government should critically examine the operation and efficiency of the wholesale market, including the occurrence of price speculation, uneconomic volatility, the loss of liquidity, scarcity rent-taking and bullwhip effects. It said the government should consider measures to address these phenomena focusing on transparency, forecasting, flexibility and liquidity.

Other recommendations made by the consultancy include removing legacy high-carbon generation from the Capacity Market, transferring those that are still needed into a strategic reserve, and enabling the ESO to prioritise low-carbon ancillary services as soon as practically possible by setting emissions limits where feasible and appropriate.

The government is currently considering the feedback from the REMA consultation, which closed to responses on 10 October.

In a joint report in May, Octopus Energy and the Energy Systems Catapult suggested that locational power pricing could save consumer £30 billion – or £1,000 per household – by 2035.