A switch to locational electricity markets poses the threat of denting investor confidence and would also bring little benefit, according to findings from AFRY.
Over the last 15 months, AFRY has been exploring proposals to switch over to a zonal or nodal market. The UK can ill afford more impacts on investor confidence, especially following the recent Contracts for Difference auction where there were no bids for offshore wind received, and the narrowing window to decarbonise the power system by 2035. This means a more evolutionary approach to improving market arrangements should be the best way forwards.
For example, it found that the potential economic welfare benefit from a shift to locational markets would be 1%. This would be overshadowed by wealth transfers between parties and be lost completely if investment risks in generation increase because of the change to different arrangements.
Furthermore, the distribution of benefits between consumers and producers is heavily dependent on the nature of any specific mitigation measures. These could include grandfathering of rights for existing parties. It also noted that the increased complexity of locational markets can create barriers to entry, though at least some of the benefits they do offer can be replicated through a national market framework, with less risk to investment.
AFRY went on to make a series of recommendations based on its findings, including how nodal pricing – the most granular form of locational pricing – should not be progressed, and that any further exploration of a zonal market design should be accompanied by a programme of work to explore ways in which both the risk sand wealth transfers could be mitigated. It also noted that if the existing national market is retained, then action is needed to improve incentives and achieve some of the benefits offered by locational markets.
