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Wholesale market design ‘no longer fit for purpose’ for rapidly decarbonising system – National Grid ESO

National Grid ESO came to its conclusions through the third phase of its ongoing programme of analysis into market reforms. Image: Getty

National Grid ESO came to its conclusions through the third phase of its ongoing programme of analysis into market reforms. Image: Getty

National Grid ESO has suggested that a nodal, location-based wholesale market would be the ideal shift of the market – with the current design to impose excessive costs if left.

This comes as part of the third phase of its ongoing programme of anaylsis into how GB electricity markets should be reformed to achieve net zero cost effectively.

The ESO found that the current market wasn’t designed for net zero, with wholesale electricity market reform required to deliver net zero at significantly lower cost to industry and consumers.

Its study found that the existing wholesale market design is contributing to a dramatic rise in constraint costs and inefficiencies in balancing the network while undermining the capability to deliver demand-side flexibility.

If left unchanged, the current national pricing model will impose excessive and unnecessary costs on consumers, National Grid ESO said, stating that current market design is "no longer fit for purpose" for a rapidly decarbonising system.

Reducing costs for consumers is a particular focus currently in light of the surging bills seen across the country.

Energy bills are expected to climb once again in the autumn, with Ofgem CEO Jonathan Brearley telling MPs this week that the Default Tariff Price Cap could jump in October to £2,800, after it was raised by more than 50% to £1,971 in April.

The favoured option for wholesale market reform is a nodal location-based wholesale market with central dispatch, according to National Grid ESO's report, which analysed over 1,500 individual stakeholder interactions.

Nodal pricing divides the national network into different nodes, each of which has its own wholesale electricity price which reflects the cost of supplying electricity at that location.

When coordinated by central dispatch, this could help unlock efficiency savings and provide an easier route to market for small, flexible assets, the ESO said.

Indeed, it found that found that real-time, dynamic, locational signals are needed to inform how both supply and demand assets dispatch in operational timescales, with neither national nor zonal pricing able to deliver efficient locational signals as GB transitions to a net zero energy system.

This option could create opportunities for low-cost, low-carbon electricity to be harnessed when and where it is abundant, with this then contributing to lower household electricity prices and reduce network operating costs while also helping to decarbonise the system.

Additionally, it could also facilitate the efficient management of the system and help to incentivise flexible assets to locate and operate in the optimal way for the electricity system, the ESO said.

The scale of these benefits is currently being assessed by Ofgem, with the ESO’s report feeding into the process. The decision for a fundamental reform sits with the government, however, with the ESO stating it is continuing to work closely with the government on the Review of the Electricity Market Arrangements (REMA).

Cornwall Insight, meanwhile, recently stressed the need to protect investor momentum in the REMA, which is looking at the current energy markets and whether or not they’re fit for net zero.

The next phase of analysis by the ESO is to assess the implementation and implications of nodal pricing and central dispatch, as well as assessment of other market design elements to complement these proposed reforms to the wholesale market.

“Markets are one piece of a broader picture and cannot be looked at in isolation from holistic network design and capacity adequacy – they must be structured to incentivise dispatch and investment decisions critical for clean energy and consumer value,” said Cian McLeavey-Reville, senior manager, markets development, ESO.

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