Locational signals in a reformed national market: a review of options

The UK Government’s Review of Electricity Market Arrangements (REMA) aims to reform the design of the wholesale electricity market to support the delivery of net zero. Locational signals are at the centre of the REMA debate, fuelled by the growing cost of transmission constraints which are argued by proponents of reform to be related to the lack of locational signals on investment in, and operation of, assets connected to the network. REMA is considering two market structures. The first is a move to zonal pricing. That means the market price of electricity varies between zones across the country based on local supply and demand and local import and export constraints. The second is based on developing a ‘reformed national market’ which keeps a national electricity price and improves locational signals through other mechanisms. This will involve the implementation of a range of measures which can coordinate and work together to deliver our overall societal objectives. However, there is not yet a fully articulated version of what a reformed national market could look like. The objective of this paper is to review a wide range of options that could be incorporated into a reformed national market and help the government make a well-informed decision on which market structure to take forward. The first part of the paper focuses on the way locational signals are considered when designing our electricity market and the wider commercial and regulatory framework. It concludes that discussions often take a narrow perspective, and the paper lays out a framework for a more holistic way of considering locational signals. For example, it highlights the need to think beyond the financial incentives on generators, batteries and consumers from within the electricity system itself and take a wider perspective that encompasses non-financial signals, and those signals coming from the wider societal, economic, planning and geographical environment in which the electricity system operates. The report also suggests that locational signals are sometimes inappropriately split into investment-signals and operational-signals The second part of the report explores 16 potential interventions that could be implemented as part of a reformed national market. These include reforms that: • create stronger financial incentives on market participants to operate in particular ways, dependent on location; • improve the tools available to the NESO to influence the market dispatch or to better redispatch the market to reflect network and other system limits; • improve the locational signals delivered through the markets and mechanisms involved in non-energy services such as the capacity and ancillary service markets; • change or improve the frameworks within which the market operates; and • specifically target interconnectors. The report identifies some important areas to consider in more detail. For example, it highlights the development of constraint management markets ahead of gate closure, improvements to the way the balancing mechanism operates, and consideration of the timing of gate closure as valuable to explore in more detail. It also notes the importance of the wider structures around the wholesale market itself, and the opportunities across capacity markets, contract for difference arrangements and response and reserve provision as ways in which locational signals can be delivered. The report also reflects the importance of aligning electricity wholesale market reform with other developments in the electricity system. This includes the strategic planning now underway to deliver the UK’s Clean Power 2030 plan and later the Strategic Spatial Energy Plan expected to support the delivery of net zero.