Locational pricing could save £30 billion by 2035, according to a new study from the Energy Systems Catapult (ESC), commissioned by Octopus Energy.
The study found that by moving to a market with locational pricing for wholesale electricity, it would increase flexibility, reducing the need for balancing actions, and help decarbonise the electricity system.
Such a system would be able to more accurately reflect challenges around balancing supply and demand, encouraging more efficient operation and the right balance of investment in generation, grid distribution and flexibility technologies such as storage.
“To get to net zero quickly and cheaply, we need to transform the energy system that was designed for a different era,” Octopus Energy, director of Regulation and Economics, Rachel Fletcher said.
“This important report shows that radical changes to the wholesale market are needed to make the most of local green electrons when they are abundant, drive investment to places where it is needed the most and make green energy cheaper for all.”
The report – titled Location, Location, Location – found that billpayers could see billions of pounds of savings by 2035 due to a number of key factors driven by the introduction of locational pricing. These include more efficient location and dispatch of generation and storage, more efficient use of grid infrastructure and more investment in storage technologies and in generation supported by carbon capture to complement renewables.
According to the ESC, electricity users in all regions would see benefits from switching to locational pricing, although this will be proportionally greater in Scotland and the North of England. The estimated benefits are based on conservative assumptions and simplified reforms, with further benefits possible under a more refined market design.
“Getting energy policy right has never been more important. Surging prices and the war in Ukraine remind us of how central energy is to our cost of living, economic competitiveness and national security,” said ESC senior advisor of net zero policy, George Day.
“But our wholesale electricity markets were designed for a different age, with a single wholesale price, meaning power plants sell their electricity on a national market even if there is no demand for that power or no way of transporting that power hundreds of miles to where it is needed. This is increasingly out of step with reality in a system that is being transformed for net zero.”
Each year, more than £1 billion is spent on balancing actions, including the curtailment of renewable generation such as wind. The costs of these actions have been rising as the UK transitions to a more diversified and decarbonised energy system, with a larger percentage of intermittent generation.
Daily Balancing Mechanism costs reached an all-time record of more than £60 million on 24 November 2021. Following this, Ofgem stated it is ready to use its powers to change market rules if necessary in light of balancing costs doubling between September and November.
The potential of locational charging is also being considered in the government’s Review of the Electricity Market Arrangements, along with broadening the role of the Contracts for Difference and splitting the low carbon and dispatchable generation markets.