An independent review based on research by the University of Strathclyde has advised caution on Britain ‘rushing’ into a major wholesale electricity market reform based on locational marginal pricing (LMP).
The report was supported by energy suppliers SSE and Scottish Power who engaged the University to conduct the report.
An LMP system involves determining market prices for multiple locations on the transmission grid, called nodes. This structure would alter how generators dispatch energy, as they would produce power in response to the system operator rather than their contract or market conditions.
As costs driven by transmission network constraints surpass £1 billion, stakeholders such as Energy Systems Catapult and the National Grid ESO have suggested LMP (or Nodal Pricing) as an attractive solution for the wholesale market and to reduce consumer costs.
The new report however, warned that the increased risk to investors in new generation energy capacity and the cost of capital involved in implementing an LMP system could negate any potential benefits.
Professor Keith Bell who co-authored the study said: “There are very real concerns about the potential impact of reform on cost of capital at a time when we need massive investment to transition our electricity system to one with negligible carbon emissions.”
Bell also warned of the potential of a “postcode lottery” caused by LMP as, although there is potential for some locations to benefit from lower electricity costs – for example those living near a wind farm – others may experience an increase in the price of electricity.
The report did recognise that LMP could be one way to unlock greater grid flexibility but cautioned that the associated risks of a rushed and poorly designed market reform ought to be carefully weighed.
“The potential adverse impacts of LMP, such as for investment to ensure reliable supplies of power and low emissions, can be somewhat countered through other arrangements. However, getting everything in place in time for the mid-2030s would be very challenging,” said the report’s lead author, Dr Simon Gill.
To increase grid flexibility the authors suggested investing in new energy storage to balance the availability of wind and solar generated power.
The report concluded that implementing an LMP system requires careful consideration, and Dr Gill warned that getting the right infrastructure in place for the mid-2030s would prove “very challenging.”
Crucially, the report warns that rushing a market reform could harm the biggest potential gains for consumers from the energy transition.
“It’s not possible to simply take an ‘off the shelf’ LMP implementation, as used in other markets around the world, and plug it in to Britain,” said Dr Callum Maclver, research fellow at Strathclyde and co-author.
“The systems would cost hundreds of millions of pounds to develop and there are many details that need careful consideration, not least how LMP and associated instruments such as ‘financial transmission rights’ would work in a renewables-dominated system that promises to be quite unlike anywhere where LMP is used today.”
The report will help build an LMP evidence base to inform the UK Government’s Review of Electricity Market Arrangements.
