Trade associations RenewableUK, Scottish Renewables and Solar Energy UK have warned that a radical shift in UK energy market design would increase the cost of electricity.
The groups believe that an outcome of the Review of Electricity Market Arrangements (REMA) which recommended ‘Locational Marginal Pricing’ would “inevitably” lead to higher prices for consumers.
The plans are being considered by the government and energy regulator Ofgem, and would mean that the wholesale price of electricity would vary across Great Britain. This system would mean the end of national prices for electricity and see the creation of local ‘nodes’, where prices would be based on local supply and demand.
Advocates of ‘nodal pricing’ like the Energy Systems Catapult and National Grid ESO say that such changes would incentivise the creation of renewable energy generation closer to where the demand is, reducing the need for costly upgrades to the energy grid.
‘Radical shake up of the energy market would create huge uncertainty for renewable energy investors’ – Joint @RenewableUK, @SolarEnergyUK_ and @ScotRenew Media Release
— RenewableUK (@RenewableUK) August 24, 2023
The cost of #electricity will inevitably rise for consumers if plans for a drastic overhaul of the market go… pic.twitter.com/CEKXTEKmsa
However, Scottish renewable producers are wary of the changes, which could reduce the return on investment of renewable assets further away from demand centres, like offshore wind.
The trade associations say that “some analysts” believe the system would increase the cost of reaching net zero “by up to £87 billion and undermine investor confidence.”
At the beginning of this year, the University of Strathclyde advised caution on Britain “rushing” into a major wholesale electricity market reform based on locational marginal pricing (LMP) following independent research which showed that market structure could create a ‘postcode lottery.’
These sentiments were echoed in a briefing note written by Simon Gill and published in conjunction with the Scottish Futures Trust which found that although a zonal pricing market could lower energy bills for consumers in Scotland substantially, concerns remain around its impact on sector investment.
Instead of locational marginal pricing, the trade bodies have commissioned a report by Cornwall Insight, which “focuses on reforming contracts to generate clean power, (Contracts for Difference), to enable them to deliver even more benefits for billpayers.”
Tom Luff, senior advisor at the Energy Systems Catapult, said: “fundamentally, change is needed. We won’t get to net zero with the current arrangements.” The challenge is deciding the specific changes we need, Luff says, and how radical and fast they need to be.
National Grid ESO is also in favour of locational marginal pricing, because this would help reduce the problem of balancing costs. The Nuclear Industry Association says that “The cost of balancing Britain’s power grid hit £4.19 billion last year according to Nuclear Industry Association analysis of National Grid Electricity Systems Operator (ESO) data”.
RenewableUK says that its report proposes six more market reform options, “such as paying generators in innovative ways to ensure that supply always meets demand even more closely. These changes would help to transform our energy system to meet net zero by 2050 whilst avoiding the risk of a potentially catastrophic investment hiatus.”
RenewableUK’s economics and markets manager Michael Chesser said: “Injecting further volatility and uncertainty into our energy market would have very real and very negative consequences for billpayers. If Locational Marginal Pricing were to be implemented, it wouldn’t only increase costs across our whole energy system, but it would also create a bizarre regional or local post code lottery of prices for consumers, inflating bills in England especially.”
Solar Energy UK’s director of policy and delivery Gemma Grimes said: “Our members are very concerned about this plan. Over £200bn of investment is needed by 2037 across the electricity sector to deliver on the UK’s climate commitments, so making energy prices more volatile, disrupting investor confidence and increasing the cost of capital at this time would be deeply unhelpful. Worst of all, it will push up consumer bills, too”.