Changing to a zonal pricing market could bring down energy bills for consumers in Scotland substantially, but there are concerns about its impact on investment.
This is according to a briefing note written by Simon Gill and published in conjunction with the Scottish Futures Trust which explores the impact that the current Review of Electricity Market Arrangements (REMA) may have on Scotland’s energy system and considers the potential for Scottish renewables supporting Britain’s electricity demand.
In July 2022, the UK government launched the initial proposals for the REMA, dubbed the “biggest electricity market reform in a generation”. The review underlined a number of potential reforms to support the UK’s transition to renewable energy.
The briefing note compares the areas of reform under review by REMA with Scotland’s ambitions, highlighting areas of particular importance for the country.
Capacity adequacy
The brief highlights that Scotland’s electricity supply and its security is ultimately linked to Great Britain’s as a whole, meaning that capacity market optimisations which could give low carbon providers an advantage are of particular interest to the Scottish market.
In National Grid ESO’s modelling for its Future Energy Scenarios (FES), Scotland represents a thriving renewable energy potential. In the 2022 FES, Scotland’s wind generation prediction for 2035 ranges from 49GW to 56GW which, Gill points out, is beyond even Scotland’s targets. However, the figure illustrated, that as Britain’s wind capacity ranges from 100GW to 150GW, Scotland will only supply roughly 50% of Britain’s overall wind capacity.
Despite this, the FES demonstrates that demand for electricity in Scotland will slow as we move towards 2035, but generation will continue to grow, eventually supplying over three times the level of demand in 2035.
Using these figures, Gill identifies a potential opportunity for Scotland’s renewable generation to meet Britain’s wider electricity demand, but warns that doing would require “a sufficient capacity of transmission network within Scotland and between Scotland and the rest of GB”.
Wholesale electricity market
The current framework for the wholesale market is also currently in review as different arrangements are considered to best support the way electricity will be traded between generators, suppliers and large consumers.
One of the alternate options includes adopting a locational marginal pricing (LMP) structure – otherwise known as nodal pricing – which would consist of a market where energy prices were determined across multiple locations on the electricity grid.
This structure has received mixed reviews in the industry. Although National Grid ESO and Energy Systems Catapult have presented a nodal wholesale market as an attractive alternative to the current market structure, there is fear that an LMP system could impede investment for vital renewable assets, including wind and solar.
The briefing notes that moving to a zonal pricing market could see electricity prices paid by consumers in Scotland “fall substantially” in comparison to the current market levels. However, Gill echoes worries over the change in “incentives on generation developers, influencing investment, location and operation” that an LMP structure may entail.
It is also highlighted that locational pricing models could cause Scottish generators to lose the firm access rights enjoyed under the current arrangement, which financially insulate them from a lack of network capacity. Jeopardising these rights, the briefing continues, “could have a significant impact on revenues and risks; especially where that is combined with regular zero or negative prices”.
Low carbon support
Low carbon support mechanisms such as the contracts for difference scheme (CfD) are also subject to reform, as they are expected to play a key role in the UK’s energy transition.
Any risk facing renewable developers, states the briefing, relies heavily on the interaction between the wholesale market design and existing support mechanisms.
In the case of CfDs, current regulations do not grant generators top-ups if the reference price is negative. Gill cautions that this aspect of the current CfD framework, if combined with LMP, could “erode the revenue-security that CfDs provide”.
Flexibility
The constraints currently present on the electricity network have opened a favourable market for flexible technologies.
Alongside battery energy storage, Gill notes that Scotland’s ambition to develop a strong hydrogen economy can feature heavily in granting greater demand-side flexibility.
“The wholesale market itself (which sets the price of the energy input to electrolysis either directly, or through ‘opportunity cost’ of using generation to run an electrolyser rather than for export) and the frameworks for flexibility services have the potential to support the development of that hydrogen system, if reformed in the right way,” he wrote.
Commenting on the briefing, Gill’s told Current±: “The Scottish Parliament has set ambitious and binding targets for decarbonising Scotland’s economy. These include a 75% reduction in greenhouse gas emissions by 2030 against a 1990 baseline, and reaching net zero by 2045. Achieving these targets will depend heavily on an electricity system that is fully decarbonised and capable of serving new forms or demand including electrified heat, transport and hydrogen production. It is important that both the physical infrastructure and the market framework develops in a way that supports these ambitions. But this isn’t just about Scotland’s own targets – the UK government’s commitment to fully decarbonise the GB electricity system by 2035, subject to security of supply, will rely to a great extent on Scotland delivering its renewables capacity and decarbonising demand. The same applies to the ability to meet the UK’s sixth carbon budget.
“By making good, well-informed decisions through REMA we can support the transition to Scotland and UK net zero, and we can accelerate the process of decoupling electricity prices from gas, something that is important in protecting consumers from a future price crisis.
“REMA is probably the most complex and far-reaching consultation I’ve seen since I came into the energy sector more than a decade ago, and I worry that many important stakeholders are struggling to understand the options and implications. It is critical that we help as wide a group of stakeholders as possible engage in this process.”
