The power market is facing its biggest overhaul in decades after National Grid said that wholesale electricity should be traded at local prices that vary from town to town.
The company responsible for keeping the lights on said that the radical change was needed because Britain’s national electricity market was “not designed for net zero and if left unchanged will impose excessive costs to consumers”.
At present, power plant owners can sell their electricity on the national market, even if there are not enough cables to take that power to where there is consumer demand.
That is forcing National Grid’s control room to pay wind and solar farms in remote locations to switch off at times when the network cannot cope and to pay expensivegas plants closer to consumers to switch on and replace them. These “constraint” costs, which are passed on to consumers via their energy bills, have risen sevenfold since 2010 as more renewables have been built, hitting £1.2 billion in 2021.
The National Grid ESO, or Electricity System Operator, warned industry last week that keeping supply and demand in balance nationwide was “becoming more challenging” and was resulting in “dramatic and rising costs for consumers”, even with plans to build lots of expensive new transmission cables. Constraint costs could hit £2.3 billion a year by 2026 without market reform, it said in a presentation seen by The Times.
A new system with local prices that vary at thousands of “nodes” around the country would tackle this issue, as power plants would get paid only for electricity that was needed locally or could be transmitted elsewhere via the cabling network.
It would encourage energy-intensive industries to be located near wind farms around the coast or in Scotland to take advantage of cheap wholesale prices for electricity that might otherwise be wasted.
It also could pave the way for households to be charged variable local prices, which would mean those living near wind and solar farms paying much lower prices when they are generating.
However, the decision over whether to expose domestic consumers to local wholesale prices would be controversial as it would raise fears of a “postcode lottery”. The government is expected to consider the idea of local wholesale pricing as part of a sweeping “Review of Electricity Market Arrangements” shortly, while Ofgem has already commissioned a study on the idea.
National Grid will publish formal recommendations this spring, but it told industry that local pricing was the only effective solution and could be implemented within five years.
Jake Rigg, director of corporate affairs at the National Grid ESO, told The Times that its analysis showed “a need for a powerful locational signal for demand and generation”, which was “critical as we look ahead at how to get to net zero”. For example, Scotland was planning new wind farms capable of generating up to 25 gigawatts of power, about twice as much as already in place, he said. However, peak demand in Scotland was only about 4GW, creating “a massive mismatch” that must be addressed. Cabling from Scotland to England and Wales is limited and even a series of expensive new links are not expected to solve the issue.
“This market reform would create a powerful economic incentive to encourage energy-hungry initiatives, for example data centres, to be located in Scotland,” Rigg said. “Without this type of structural change, then we are staring at big costs.”
Guy Newey, of the Energy Systems Catapult, an independent innovation centre, said: “Creating more local energy markets is an essential component of the reliable, clean grid we need. Introduction of nodal pricing could help people who live near wind turbines benefit from super-cheap electricity when the wind is blowing and it will encourage drawing on technologies like electric vehicle car batteries when prices are high in a particular area.”
Ed Birkett, who wrote a paper advocating local pricing for Policy Exchange, the think tank, said: “Prices could vary significantly between regions at different times of day. For example, when it’s windy, prices would drop in Scotland because there are lots of wind farms there. Conversely, when it’s sunny, prices would drop in Cornwall because of high output from local solar farms.
“This would encourage more companies to build battery storage and hydrogen production facilities in these areas to soak up excess generation.”
A government spokesman said: “We continue to look at various options to ensure our electricity grid is running as cheaply and efficiently as possible, but no decisions have been made on any reforms.”
Ofgem said that “any changes to locational pricing would be complex and need careful consideration”. https://www.thetimes.co.uk/…/electricity-market-needs…
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