Post: Wholesale market design not fit for purpose, says National Grid ESO

Wholesale market design not fit for purpose, says National Grid ESO

Reform of the electricity market is critical for the delivery of a decarbonised energy system, and nodal, location-based wholesale market would be the ideal shift of the market.

That’s one of the findings of National Grid ESO’s report, which suggests the current market design, based on a blanket national wholesale price for electricity, is no longer fit for purpose to meet the decarbonisation needs of the future. Published on 24 May the report warned that the existing wholesale market design is contributing to a dramatic rise in constraint costs and inefficiencies in balancing the network while undermining the capability to deliver demand-side flexibility. It also said if the current market is left unchanged, it will lead to excessive costs for companies and customers in the future.

The favoured reform option outlined in ESO’s report is a nodal location-based wholesale market. Nodal pricing essentially divides the national network into different nodes, each with its own wholesale electricity price that reflects the cost of supplying power at that location. When coordinated by central dispatch, this could help unlock efficiency savings and provide an easier route to market for small, flexible assets, the ESO said. But real-time, dynamic, locational signals are needed to inform how both supply and demand assets dispatch with neither national nor zonal pricing able to deliver efficient locational signals as GB transitions to a net zero energy system.

This could create opportunities for low-cost, low-carbon electricity to be harnessed when and where it is abundant, with this then contributing to lower electricity prices and reduce network operating costs while also helping to decarbonise the system. It could also facilitate the efficient management of the system and help to incentivise flexible assets to locate and operate in the optimal way for the electricity system.

The next phase of analysis by the ESO is to assess the implementation and implications of nodal pricing and central dispatch, as well as assessment of other market design elements to complement these proposed reforms to the wholesale market.

Separately, in a report, published on 17 May, Energy Systems Catapult found that moving to a market with locational pricing can deliver a more affordable, flexible and clean electricity system, accurately reflect the real-time challenges of managing supply and demand on a low-carbon grid, and incentivise investments in places that are not only good for generation, but also offer the best value for delivering power to users.

Without reforms being made, there is a risk consumers will have to pay “spiralling” costs to balance the system. Over £1bn is spent each year by the electricity system operator on balancing actions, with these taken to current results of wholesale markets that the Energy Systems Catapult said are currently too simplified to reflect real conditions on the grid. It said that reforming markets so that price signals better reflect local supply and demand conditions can deliver up to £30B total savings for electricity users up to 2035. It also said that reforms could lead to an annual reduction in system costs of around £3B per year up to 2035, with further benefits expected into the 2040s as the system expands to meet demand from transport and heat.

It outlined how these savings reflect more efficient location and despatch of generation and storage across the system, as well as more efficient use of network infrastructure, including interconnectors to European markets. It also highlighted how locational pricing was found to incentivise a more efficient generation mix, leading to more investment in storage technologies to complement renewables, earlier investment in carbon capture and storage plants in England, and a major expansion of offshore wind located, on average, closer to demand in England.

GridBeyond Managing Director UK and Ireland Mark Davis said:

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