Fairly allocating risk, and making it clear where risk will be shouldered, is a key component of the ongoing Review of Electricity Market Arrangements (REMA) discussion.
This was a conclusion drawn by speakers at Solar Media’s Wind Power Finance & Investment Summit, held in London this morning as part of the Clean Power 2030 Summits. Nick Speechley, director of fund management at InfraRed Capital Partners, described himself as “zonal-skeptical” on the topic of the key pricing reform proposal under the REMA review, and said that the introduction of zonal pricing would introduce uncertainty that could discourage investment in the UK grid necessary for growth, let alone reform.
“We don’t have the required detail to make a full assessment,” said Speechley. “At a high level, the very obvious impact is that if we have zones and there is a saturation of wind, for example, we would see reduced capture prices; so there’s a price risk there, and a volume risk, that might be greater, as there might be greater levels of curtailment as we’re seeing more negative prices.
“From an investment perspective, all investments start with a financial model,” he continued. “Two of the key inputs are your revenue inputs over the lifespan of a project and what will transmission charging look like. Zoning throws a serious spanner into both of those things.”
This is particularly significant considering the vast sums of money that will need to be invested into the UK grid system, which carry similarly significant volumes of risk. Today, Ofgem approved a £24 billion grid upgrade plan, to help deal with a backlog of projects waiting for grid connections that account for a mammoth 756GW of capacity.
“It raises that question of ‘who is best able to best cope with those risks?’,” argued Sarah Honan, head of policy at ADE: Demand, who said that the increased risks for investors are significant, but that investors are far better-equipped to deal with those risks than, say, domestic consumers, who could be more exposed to price risks without the transition to a zonal model.
“The domestic household doesn’t even have a model to input those risks into it that Nick talked about,” Honan continued. “Investors are far more capable and built to deal with that risk and implement it, than the demand side is.”
De-risking investments
The panelists all agreed that de-risking grid investments would be a priority, regardless of the outcome of the REMA reform.
“How do you maintain investor confidence when you’re driving massive change?” asked Rosalind Smith-Maxwell, director of Quinbrook Infrastructure Partners and the panel’s moderator. “You need to maintain investor confidence because if investors are uncertain, they’ll charge you more for their money.”
“There’s a need to de-risk investment, particular for things like batteries and long duration energy storage (LDES) alternatives,” said Speechley. “It’s quite likely we would see investment hiatus and a really fundamental impact would be a cost of capital impact.”
The panelists also discussed other markets that have switched to zonal prices, or more flexible energy mixes, with varying degrees of success. When asked about what a more nuanced energy mix would look like, a reformed pricing system not quite as extreme as a nationwide zonal scheme, Honan said that: “we would have to restart charging reform.”
“If that was the decision, we would have to explore local constraint markets [but] NESO says they can’t do that. Dispatch reform will be the thing – ideally we’d have shorter gate closure – but I think given we’ve ruled out central dispatch, we need to completely reimagine what dispatch looks like. One model would be the Australian model [where] the market behaves like a self-dispatch system.”
‘Scandal today, crisis tomorrow’
Honan also suggested that there needs to be a change in narratives around the zonal pricing discussion, as it is domestic consumers that stand to lose the most under the status quo.
“You’d be hard pushed to find someone to admit they’re happy with the status quo,” said Honan. “From our perspective, you’re seeing a creaking system and a lot of that creaking is coming from constraint costs; it was £170 million ten years ago, it’s going to surpass £1.7 billion this year. A tenfold increase in ten years, and reaching over £3 billion by the end of the decade; that’s not sustainable where we’re fast approaching a referendum on net zero.”
Honan emphasised that these consumers need “active participation in the energy markets they fund”, to avoid a worst-case scenario where people are shouldering the burden for an increasingly complex, and potentially expensive, energy mix. She went on to say that in this scenario, confusion and cost over the pricing discussion could diminish interest in the entire renewable energy transition, and be co-opted as “a great tagline for Reform in the next general election”.
She added that would begins as a scandal today could become a crisis tomorrow, if this narrative is not challenged.
