RWE boss: Zonal pricing less risky but not needed

A shift to zonal electricity prices would be less risky than nodal pricing but is still not needed, RWE country chair Tom Glover told Utility Week.

Glover said the government’s decision to rule out nodal prices, under which the wholesale market would be broken down into a myriad of local nodes, was welcome.

However, the RWE country chair still questioned whether the less radical zonal pricing reforms of the wholesale market was worthwhile.

The government ruled out the option of more granular nodal pricing for its second REMA consultation launched last week.

Instead the consultation, issued by the Department for Energy Security and Net Zero (DESNZ), proposes either a zonal form of locational marginal pricing (LMP) or reforming current national tariffs to better reflect the costs of generating electricity in different parts of the country.

On zonal pricing, Glover said: “Our very initial view is probably still the risks outweigh the benefits but it’s a lot less risky than nodal.

“We’re not yet convinced there is a good enough business case for zonal but it’s a much less risky system for investors and much simpler to implement.”

This is partly because averaging out prices averaged over a zone leaves investors “not so exposed” to the risk of a new generation asset being built next door with the knock-on implications for local charging levels, he said.

Another plus point for zonal versus nodal pricing is that bigger geographical units create conditions for better liquidity of investment than smaller nodes.

Glover said generators like RWE have been used to modelling the different prices on offer in the TNUoS (Transmission Network Use of System) regime’s different geographical zones for decades.

TNUoS already offers a “very clear zonal system for siting assets”, he said: “If we get to TNUoS reform right, I would argue that the locational signal of siting is there.”

And while agreeing that the current system is not dispatching the interconnectors efficiently the RWE country chair said: “The question is do you need to redesign the market for everybody in order in order to dispatch cross border interconnectors correctly?”

Before proceeding with wholesale market reform, analysis should be carried out how the costs and benefits of zonal pricing compare to a “fully optimised” version of the existing network tariff regime rather than how they stack up relative to the existing status quo, Glover said: “If you haven’t optimised the current market, then you haven’t really done a fair comparison if is there a business case (for zoning).”

On the government’s commitment to bringing forward new gas-fired generation plants, he said that the capacity market already offers support for this kind of fresh capacity.

And while welcoming the government’s “very frank” acknowledgment that substantial back-up gas plants would be needed until well into the 2030s, this goal can be largely achieved by continuous refurbishments of existing capacity, like RWE is already carrying out.

The government’s REMA announcement also:

• Outlined a prospective five-year timeline for implementing zonal pricing
• Estimated that zonal pricing could push 10GW of offshore wind into Southern England 
• Laid out plans for an optimised Capacity Market and revamped CfDs
• Forecast the link between gas and power prices will rapidly diminish