REMA and the coming changes of the UK electricity market
The energy transition brings significant changes that require rethinking the rules of the electricity market. That is why the UK government launched the Review of Electricity Market Arrangements (REMA) consultation process.
The UK currently faces a problem: Scottish wind parks are producing the cheapest renewable energy. But the majority of the demand sits in Southern England. And there are not enough transmission lines to transport all the electricity produced in Scotland to England. To match supply and demand, you must curtail (limit) the amount of electricity produced in the North and use expensive fossil fuel generators in the South.
Therefore, one question being asked is whether having a single electricity price across the whole of Great Britain (Northern Ireland is in a joint market with the Republic of Ireland) is still the best option in this situation.
What is Locational Pricing?
Currently, people pay the same price for each electron whether it is being produced in Kent, in the Midlands or off the Scottish coast.
A result of REMA could be that Great Britain gets split into multiple markets to send stronger price signals and to balance the market better:
If you have lots of demand in one market, prices would increase, incentivising people to consume less or at different times.
If a lot of electricity is produced in another market, prices would fall (oversupply), and generators would be incentivised to reduce production.
Over the long term, energy-intensive industries would ideally move into markets with cheaper prices. And investors would build more generators in markets with high prices.
Electricity markets can be organised around Nodes or Zones.
What is Nodal Pricing?
According to ofgem (the UK regulator), a node is a single point in the network where wires/cables meet. This could be the substation where a generator connects to the local network. Or where the local electricity lines connect to the wider transmission network.
And each of these connection points would have its own electricity price.
Several countries/regions worldwide use this model, notably Texas, California, New England, Singapore and New Zealand.
The problem with Nodal pricing is that you create tens of thousands of tiny “markets” across the network. And each market has only a few generators and consumers. Therefore, the normal price-setting mechanism through the market doesn’t work in this case.
As a result, you need to introduce a central dispatch system and abolish the intra-day market. The sole responsibility for balancing supply and demand lies with the system operator in a nodal pricing model.
What is Zonal Pricing?
Price zones can be drawn up in different ways. Often, they follow geographic dividing lines or bottlenecks in the transmission network (interconnections between regions).
Within Europe, Norway, Sweden, Denmark and Italy have already split their countries into different price zones.
Source: Wikipedia
As long as the zones are big enough (i.e. enough market participants), electricity prices tend to be more stable and predictable than nodal prices. Consumers and generators can help the system operator balance the network through an intra-day market.
However, you will need some form of locational hedge or financial instrument for PPAs if the generator and the consumer are not in the same price zone.
Closing thoughts
The next government communication regarding REMA is due before Christmas, and industry insiders expect that we will get some additional information regarding the potential introduction of locational pricing.
It would take several years to introduce nodal or zonal electricity markets. Not only would you need to update all the laws and regulations, but also test the system thoroughly before switching away from the current model. We can’t afford disruptions in the flow of electricity.
It will not be a quick fix for the current problems of congested transmission lines and long waiting times for new grid connections.
But splitting the British market into several price zones would create enough pressure to incentivise :
the build-out of new transmission lines (because people in the South will be angry with politicians due to higher prices) and
drive the adoption of demand-side responses (smart meters, load shifting, etc.) from consumers.
One open question will be how to integrate legacy PPAs into this new market. The previously agreed price could be significantly lower or higher than a future locational price. Who will carry the financial burden or benefit from these old contracts?