This morning (04 July) saw National Grid ESO (ESO) present its conclusions on investment policy for net zero as part of the organisation’s Net Zero Market Reform project.
The Net Zero Market Reform project (which began in 2021) aims to ‘holistically’ examine what changes need to be made to the current GB electricity market design to achieve next zero.
Today’s webinar presented the conclusion from Phase 4 of the project and saw one of its guest panels caution against letting “perfect be the enemy of good” for renewable investment policies.
Investment reform
Achieving net zero will require “unprecedented” levels of investment in terms of scale and pace, said Clan McLeavey-Reville, head of markets development at ESO opening this morning’s webinar.
Investment policy is one of the three key challenges facing the British energy market’s transition to a net zero structure, alongside the wholesale market design and operability.
The ESO today emphasised the need for investment policy support through this decade.
To do so, it is essential that the exact type of investment policy needed is determined to identify missing money not provided by day ahead market prices. Once this is established, investment support will need to be aligned to day ahead and balancing markets.
ESO declared that current investment policies are not fit for purpose and reform will be required to avoid costly market distortions.
Building a net-zero-ready market
A vast amount of investment will be required to reform GB’s electricity market to become net-zero-ready.
According to ESO the amount of times it has had to use redispatch actions has increased significantly indicating that “the link between wholesale market incentives and real-time system needs is broken”.
‘Redispatch actions’ are used by ESO to manage congestion. The action involves instructing selected generators or loads to change their schedule using selected tools such as the Balancing Mechanism (BM).
The ESO directly attributes the increase in redispatch actions with higher renewables penetration.
The absence of accurate real-time wholesale prices leaves the market without “sufficient visibility” of underlying system value, continued McLeavey-Reville, and the BM can only convey locational operational systems in an “opaque and imprecise manner”.
One of the solutions strongly advocated for by the ESO is Locational Marginal Pricing (LMP) which, continued McLeavey-Reville, would reveal the true real-time value of electricity thus maximising renewable capacity via efficient flexible resource operation.
ESO suggested that a LMP structured market would be an ideal shift for GB’s energy market as early as May 2022 however, other members of the energy market have advised caution over implementing the structure due to concerns such as the potential of a “postcode lottery”.
Funding a net-zero-ready market
The Review of Electricity Market Arrangements (REMA) puts investment needs for future flexibility and networks at £300 billion said James Samworth, partner at investment company, Schroders Greencoat, speaking as part of one of this morning’s panels.
However, Samworth noted that capital has become more scarce and expensive in the last 12 months whilst infrastructure funding has decreased by 30% year-on-year – a worrying figure for a national market player competing for capital.
In order to re-incentive investment into GB renewables, the nation must provide an attractive and internationally competitive investment package.
Fellow panellist Andrew McAleavey, founder and COO at energy storage developer and operator Penso Power, urged that delivering a good investment package in a timely manner is the most important goal and that REMA ought not to stay “hung up” on delivering a perfect package – “don’t let perfect be the enemy of good” warned McAleavey.
In its holistic long-term vision, the ESO outlined three key implementation phases for GB’s electricity market design.
The first phase is the rapid expansion of flexible capacity from now to 2027, including a half hourly market arrangement, retail market reforms, wider access to the BM and a connections reform.
The next phase focuses on investment policy realignment to achieve a 300% increase in total Contracts for Difference (CfD) support between 2025 and 2030.
Achieving this would entail a CfD reform and improvements to the Capacity Market as well as investment policy reform for post 2030 to reflect the “radically different nature of system security requirements”. It’s also imperative that the new CfD structure is coherent with the chosen wholesale market design, added ESO.
The final phase through the 2020s to be implemented by the early 2030s would see a whole market redesign which allows demand, storage and interconnectors to dominate the nation’s dispatchable capacity.
LMP would allow assets to be aligned with two-way flows and system needs, continued McAleavey, whilst dynamic and granular wholesale market signals – alongside demand exposure – could “unlock our growing flexible resource”.
ESO’s final Net Zero Market Reform report will be published this autumn.
