Towards a new framework for electricity markets
Rethinking Electricity Markets is an Energy Systems Catapult initiative to develop proposals to reform electricity markets so that they best enable innovative, efficient, whole energy system decarbonisation.
As part of the project, we worked alongside Poyry to:
- identify and characterise key sources of value within electricity markets and how they are reflected in current GB arrangements,
- review approaches taken in other jurisdictions and identify the main strategic choices for GB electricity policy for improving market signals across time and space,
- consider how to strengthen the evidence base to inform decision-making about improving the coherence of the existing UK market framework.
This report summarises the key project findings and puts forward an initial approach for developing a future market framework that better reflects the true value to the system of different resource types. It also highlights key areas for improving market signals in current arrangements and suggests further areas for research.
Looking at other jurisdictions, we found that:
- Electricity market designs are diverse and underpinned by different philosophy for market development.
- Nodal and zonal pricing approaches allow for better locational differentiation in pricing at wholesale level. They are likely to rely on financial tools to enable risk hedging for market participants.
- Nodal pricing tends to rely on centralised algorithms for decisions about dispatch and trade. This is at odds with current GB practices.
- There are inevitably trade-offs between nodal, zonal and national approaches. They cover areas such as efficiency of use of network and generation resources, market power, locational investment choices and price credibility.
Our preliminary assessment suggests the following key areas necessitate further attention to improve market signals in GB, while retaining decentralised trade as key coordination mechanism:
- enhancing value reflection through dynamic short-term pricing, enabling market-led innovation and risk management;
- creating options for locational differentiation within market operation and pricing, along with complementary hedging mechanisms;
- evaluating options for the decentralisation of the responsibility for delivering reliability and security of supply;
- evaluating options for a carbon intensity obligation to support carbon pricing.
We will investigate the aspects of this market framework further in the next stage of the project.
Figure 1: Potential future framework for electricity markets.