Locational energy pricing in the GB power market

Published: 1 September 2021

Fully decarbonising the electricity system to help meet Britain’s Net Zero emissions target will require significant investment in generation, networks and flexible energy resources.

As part of Energy Systems Catapult’s Rethinking Electricity Market initiative, this report by CEPA and TNEI (commissioned by Energy Systems Catapult) explores the role that locational price signals can play in minimising the cost of the future energy system. The focus of the study is on the role of energy markets and network use-of-system tariffs in offering locational price signals in operational timeframes.

Three potential approaches (‘straw-persons’) were developed to help explore market design questions and issues. Each straw person offers highly targeted signals of locational value in operational timeframes compared with the current arrangements in the GB energy market. In principle, each of the straw-persons is capable of enabling a net zero electricity system, but each also offers different costs and benefits.

Key points

  • Nodal pricing is the preferred option for ensuring efficient dispatch of resources in operational timeframes and offers high potential for new business model innovations, but it may not be viably applied at lower voltage levels at present. Successfully introducing nodal pricing in the GB energy market would require careful consideration of the level of voltage below which nodal pricing would not apply, as well as establishment of in-depth market monitoring. Behind the node, locational signals can be sent through either local flexibility/energy markets or distribution network charges, though locational marginal pricing could reach lower voltages in time with growth in distributed energy resources and improvements in data, digitalisation and network monitoring.
  • In relatively unconstrained systems, zonal pricing may achieve comparable outcomes to nodal pricing in operational timeframes without the risk of generator market power inherent in nodal pricing, and with far less change required to current system roles and processes to enable nodal pricing. However, constraints are expected to increase considerably over time due to high growth in distributed energy resources. Experience in other jurisdictions shows it can be highly disruptive and challenging to move to zonal pricing before moving again to the more sophisticated nodal pricing. It could therefore be preferable to move straight to the economically superior nodal model despite the major change, which would need careful management and transitionary arrangements. If zonal pricing is introduced, however, care needs to be taken to minimise the risk of inefficiencies from zone definitions, ensure consistency between day-ahead and balancing markets, and avoid double-counting between price signals in wholesale markets and in locational network tariffs.
  • Much more sophisticated network use-of-system tariffs could be developed but they are still unlikely to accurately reflect the cost of energy supply in operational timeframes and will be second best compared to nodal pricing. Nevertheless, they can usefully complement nodal or zonal prices at lower voltage levels. Network tariffs also offer useful longer-term investment signals.