A nodal market design in Great Britain could save consumers up to £51 billion between 2025 and 2040, Energy Systems Catapult has said.
The research, which comes at a time when the Department for Energy Security and Net Zero (DESNZ) is expected to set out its much-anticipated next steps in the Review of Electricity Market Arrangements (REMA) before the end of 2023, suggests that nodal pricing brings a host of benefits to the GB – but it is not without its negatives.
Before we delve into the findings of the report, which was created in partnership with FTI Consulting to advise Ofgem, it is important to note what nodal pricing is. Nodal pricing is also known as locational marginal pricing and involves determining market clearing prices for several locations on the transmission grid, called nodes.
The price calculated for each node reflects the locational value of energy, which includes the cost of the energy and the full cost of delivering it including energy losses in networks and network congestion.
This in turn could support innovation across the energy system with this being one of the biggest factors being taken into consideration by DESNZ.
In contrast we have the zonal pricing model whereby only transmission capacity limitations between the different zones are considered in the market-clearing process. Again, this brings positive and negative factors and thus both pricing methods are being explored.
Nodal pricing could deliver significant financial benefits
Turning our attention back to the report, one of the key findings is that the adoption of a nodal pricing system could bring £12 billion to £18 billion of additional benefits as well as 65 to 100 MtCO2 of reduced emissions in GB between 2025 and 2040. Despite this, it is unclear what these “additional benefits” encompass.
But how does nodal pricing impact consumer bills? According to the research, adopting nodal pricing could deliver between £28 billion to £51 billion in savings between 2025 and 2040. In contrast, a zonal market design would deliver £15 billion to £31 billion.
Other benefits include £13 billion to £24 billion of societal benefits in GB between 2025 and 2040 in a nodal market design as opposed to £6 billion to £15 billion in a zonal market design.
Although these are but a small number of the key takeaways from the extensive research, Energy Systems Catapult concluded that “our assessment shows a positive case for transitioning to a locational market design from a consumer perspective, with a nodal market design having greater benefits than a zonal market design”.