A new study conducted by Energy Systems Catapult demonstrates that replacing the UK’s current national approach to wholesale power prices with a localised model “could be the foundation of a net zero system”.
The report, titled International Learnings on Investment Support for Clean Electricity, used the results of a study into international Local Marginal Pricing (LMP) markets, commissioned by Octopus Energy, to support its claim.
The study was conducted to inform the ongoing Review of Electricity Market Arrangements (REMA) consultation, which is being carried out by the Department for Business, Energy, and Industrial Strategy (BEIS).
LMP – also referred to as Nodal Pricing – entails market prices being determined for multiple locations on the transmission grid, called nodes. Therefore, the price of each node would reflect the locational value of energy. This would alter how generators dispatch, as they would produce power in response to the system operator rather than their contract or market conditions.
Key findings from the report include: LMP is not an obstacle for large-scale clean-energy investments; in fact, combining LMP with “demand pull” policies for renewable investments significantly supports these investments; and, the technology mix that would develop under LMP markets could benefit the UK energy market.
The study aimed to advise a market design that would support investment both in flexibility and renewable generation. Accordingly, international markets that already use LMP in the US and New Zealand were analysed, as well as European markets that have zonal pricing mechanism.
A potential detraction to introducing a LMP system is the fear that it may hinder investment in crucial renewable assets such as wind, which need to be located at the edge of the system.
The report however, observed that the international markets that had adopted LMP, also introduced a number of “demand pull” policies which incentivise investment in renewables. Examples include clean energy standards for suppliers or tax credits in return for renewable investments. These policies produced positive results in California for example, which has boosted its network with 3.5GW of wind capacity and 14GW of solar PV since introducing LMP in 2009.
Some commentators also signalled a link between sharper price signals in LMP markets increased the cost of capital for generators, but the study reported no conclusive evidence towards that conclusion.
The report noted that energy storage was disproportionately located in LMP markets that were operated by Independent System Operators (ISOs) and Regional Transmission Organisations (RTOs).
The link between the use of LMP and the provision of storage in the US is prominent as LMP markets account for 74% of large-scale battery storage power capacity (GW) and 72% of energy capacity (GWh), despite only amounting to 58% of grid capacity.
Emerging evidence of “intermittent renewables behaving more like price-responsive assets in LMP markets by contracting with or co-locating with storage” was also signalled by the report.
“Our analysis of other national electricity markets has helped us to make several general observations that can apply to the current debate around the Review of Electricity Market Arrangements (REMA),” said head of markets, policy & regulation at Energy Systems Catapult, Ben Shafran.
“The most significant finding of the report is that Locational Marginal Pricing (LMP) can be the foundation to a net zero electricity system, and can be enhanced if coupled with policies that create a “demand pull” for clean energy investments.
“The perceived conflict between market designs that support investments in renewable generation and those that support investments in flexibility can be overcome; they do not need to be mutually exclusive. Britain does not need to choose between a market that works for investors in renewables and a market that works for investors in flexibility – both can be successfully accommodated by learning from international experience.”
National Grid ESO also suggested that a nodal wholesale market would be an attractive alternative to the excessive costs imposed by the current model, earlier this summer.