Thanks for the article but I’m still not really convinced I’m afraid! Long duration energy storage and network investment is the solution. Otherwise the lack of investment in network capacity tail is wagging the generation investment dog. To take the example - nodal pricing would disincentivise building Viking wind in Shetland for the UK whilst incentivising something similar in London - with high demand - which simply isn’t going to happen no matter what the incentive. I’m not sure how zonal pricing improves things. Do we want to relocate manufacturing offshore into the North Sea because we’ve created a North Sea zone with low prices? Don’t get me wrong: there should be a locational element to costs - but there already is with Transmission charges! Also Shetlanders should definitely benefit from the export of energy as they have done with oil and gas in the past but that should have been part of the deal in building it in the first place - I have a feeling the council backed out of joint investment at the last minute which if I’m right, was a bit of an error.
Nodal pricing will make long term storage more economically viable as very low electricity input costs become possible. It also encourages network investment as it makes it clear that a new grid connection will save money by linking your expensive node to a cheap one.
I don’t see why nodal pricing would make long term energy storage more economically viable. This depends upon the differential in prices, not whether they are just low or high; we’re going to continue to get this price differential increasing (and very low and high prices) in any case nationally - as we build more renewables. Ditto for network investment; constraint payments mean it’s abundantly clear where there needs to be investment, like the Eastern subsea link recently announced - isn’t connecting two nodes together just the same? I’m probably missing something here but like Duncan Ballantine “I just don’t get it”!
The reason ESO had to constrain off a large amount of wind a few weeks back is the transmission system in mid summer has much less capacity available as circuits are switched out for maintenance and project work when demand is low. Anyhow this mess has been created by the daft connect and manage policy that has allowed generators to be built out without corresponding enhancements to the transmission system. This is on OFGEM who consistently stalled the NG/SHET/SP Eastern Links HVDC cables that would provide significant capacity Scot-England and avoided much of the current constraints. These are coming now but not till 29/30 and as you say a lot more wind will be operational before then. Prices can be lowered for Scotland, and they should be, by just playing around with distribution and transmission charges which have penalised Scotland especially SHET area as they previously had little generation up there. Charges are already different in every DNO now so its easy enough to change them no need to play around with the system.
Very thoughtful piece, thank you. However moving to a LMP system implies that we still think price signals works and that we have a real market. I'm starting to doubt both these elements given how all developers in GB only want a CfD. The examples from other countries are good, hwoever, that was their market design at the start. Here we are intending to introduce a radical shift during the period in which we need to quadruple investments in renewable energy - sounds challenging.
The easiest solution is what @Max Carcas mentions below and just to invest in the network where we know developers are building renewable energy plants. That, however requires us to acknowledge that there is no longer a real market and we're moving to a planned system.
CfDs and locational pricing can coexist effectively. CfDs are designed to provide revenue certainty for developers, and this function could continue under a zonal/nodal system if policymakers choose to maintain it. The advantage of introducing more granular locational signals is the potential to optimise the use of existing assets—networks, generation, etc.—making the system more efficient overall. While investing in the network where renewable developers are building is an alternative, it would take considerable time and delay decarbonization efforts (just look at the track record across world)
Hi Sam, this is really interesting, do you know how easy technically it would be to move to local pricing? Is it absolutely loads of organisations who will need to adjust their processes and systems to buy and sell energy in this regional approach or are their a relatively small number of intermediaries they will make this simpler?
Network charge varies by region but not temporally, so it’s not a suitable comparator. The nodal market offers price signals that reflect available generation, prevailing demand and network capacity at every location at a specific point in time, which in renewable dominated system unlocks huge benefits
Thanks for the article but I’m still not really convinced I’m afraid! Long duration energy storage and network investment is the solution. Otherwise the lack of investment in network capacity tail is wagging the generation investment dog. To take the example - nodal pricing would disincentivise building Viking wind in Shetland for the UK whilst incentivising something similar in London - with high demand - which simply isn’t going to happen no matter what the incentive. I’m not sure how zonal pricing improves things. Do we want to relocate manufacturing offshore into the North Sea because we’ve created a North Sea zone with low prices? Don’t get me wrong: there should be a locational element to costs - but there already is with Transmission charges! Also Shetlanders should definitely benefit from the export of energy as they have done with oil and gas in the past but that should have been part of the deal in building it in the first place - I have a feeling the council backed out of joint investment at the last minute which if I’m right, was a bit of an error.
Nodal pricing will make long term storage more economically viable as very low electricity input costs become possible. It also encourages network investment as it makes it clear that a new grid connection will save money by linking your expensive node to a cheap one.
I don’t see why nodal pricing would make long term energy storage more economically viable. This depends upon the differential in prices, not whether they are just low or high; we’re going to continue to get this price differential increasing (and very low and high prices) in any case nationally - as we build more renewables. Ditto for network investment; constraint payments mean it’s abundantly clear where there needs to be investment, like the Eastern subsea link recently announced - isn’t connecting two nodes together just the same? I’m probably missing something here but like Duncan Ballantine “I just don’t get it”!
The reason ESO had to constrain off a large amount of wind a few weeks back is the transmission system in mid summer has much less capacity available as circuits are switched out for maintenance and project work when demand is low. Anyhow this mess has been created by the daft connect and manage policy that has allowed generators to be built out without corresponding enhancements to the transmission system. This is on OFGEM who consistently stalled the NG/SHET/SP Eastern Links HVDC cables that would provide significant capacity Scot-England and avoided much of the current constraints. These are coming now but not till 29/30 and as you say a lot more wind will be operational before then. Prices can be lowered for Scotland, and they should be, by just playing around with distribution and transmission charges which have penalised Scotland especially SHET area as they previously had little generation up there. Charges are already different in every DNO now so its easy enough to change them no need to play around with the system.
Very thoughtful piece, thank you. However moving to a LMP system implies that we still think price signals works and that we have a real market. I'm starting to doubt both these elements given how all developers in GB only want a CfD. The examples from other countries are good, hwoever, that was their market design at the start. Here we are intending to introduce a radical shift during the period in which we need to quadruple investments in renewable energy - sounds challenging.
The easiest solution is what @Max Carcas mentions below and just to invest in the network where we know developers are building renewable energy plants. That, however requires us to acknowledge that there is no longer a real market and we're moving to a planned system.
CfDs and locational pricing can coexist effectively. CfDs are designed to provide revenue certainty for developers, and this function could continue under a zonal/nodal system if policymakers choose to maintain it. The advantage of introducing more granular locational signals is the potential to optimise the use of existing assets—networks, generation, etc.—making the system more efficient overall. While investing in the network where renewable developers are building is an alternative, it would take considerable time and delay decarbonization efforts (just look at the track record across world)
Hi Sam, this is really interesting, do you know how easy technically it would be to move to local pricing? Is it absolutely loads of organisations who will need to adjust their processes and systems to buy and sell energy in this regional approach or are their a relatively small number of intermediaries they will make this simpler?
There is already a form of local power pricing, and has been for years.
Standing charges are different depending on where you live. Much cheaper in London, more expensive in rural areas.
https://www.ofgem.gov.uk/get-energy-price-cap-standing-charges-and-unit-rates-region
Network charge varies by region but not temporally, so it’s not a suitable comparator. The nodal market offers price signals that reflect available generation, prevailing demand and network capacity at every location at a specific point in time, which in renewable dominated system unlocks huge benefits