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System Benefits from Efficient Locational Signals

Energy transition Energy consultancy Power markets

A study on moving the electricity market to a locational pricing model for the Department of Energy Security and Net Zero (DESNZ).

LCP Delta and Grant Thornton are pleased to have collaborated to produce a comprehensive study on the impacts of moving to locational pricing in our ‘System Benefits from Efficient Locational Signals’ report. This report has played a key role in supporting the Government’s Review of Electricity Markets Arrangements (REMA).

In summary, our report finds that, with no assumed impact on cost of capital, moving to zonal locational pricing would deliver system benefits of £5bn to £15bn (from 2030-2050), compared to a national pricing counterfactual. It also shows that moving to locational pricing results in consumer benefits ranging of £24-59bn but producer costs increase by £19-36bn. The drivers of these benefits are split into two types: investment efficiency, where more efficient locational signals cause plants to locate in areas more beneficial to the system, and operational efficiency, where cost savings are a result of changes in the operation of the market (without plants changing location).

Our study finds that assumptions in the national pricing counterfactual, particularly on how interconnectors flow with the respect to constraints, make a key difference to the benefits case. System benefits of moving to locational pricing are £5bn (and consumer benefits £24bn) with interconnection redispatch inefficiencies in the national pricing counterfactual removed, but increase to £15bn where interconnection redispatch inefficiencies are included.

Within the analysis, there are several key uncertainties that will impact the results. Moving to locational pricing could have an impact on the cost of capital of investing in power generation. Our analysis finds that system cost benefits could be outweighed by modest increases in the cost of capital. Uniform increases of 0.3 to 0.9 percentage points in cost of capital for all technologies (excluding Nuclear) result in a move to locational pricing becoming a net cost to the system.

Additionally, the level of network reinforcement is a key uncertainty that could have a material impact. A delay in transmission network build can increase the benefits of moving to locational pricing as more efficient location drives higher benefits in a more constrained network. Our analysis shows that a 3-year delay in network build can increase system benefits of moving to locational pricing by 10%.

We are acutely aware of the interest that this topic has generated in the sector and hope that our contribution can add evidence to the ongoing REMA dialogue.

Please take a look at our full report (a mere 136 pages, of which the Executive Summary is 10) and get in touch if you would like to discuss further.