Locational Marginal Pricing: will it help or hinder net zero?

David Boyland, SSEN Transmission’s Senior Commercial Policy Manager, responds to industry concerns on Locational Marginal Pricing and asks if further locational signals in the energy market will help or hinder our collective journey to net zero emissions.

Scottish Renewables recently published an insightful blog on the subject of “Postcode Pricing” and the negative impact this could have on renewable energy growth. If you haven’t read it yet it can be accessed here. The blog was published on the back of the National Grid ESO’s recommendation to introduce “Nodal Pricing” to the GB market, which they presented in their Markets Forum event in March 2022. The prospect of such a fundamental change has stoked a lively debate across the industry and would involve moving away from a single GB electricity price, to hundreds or thousands of different electricity prices at ‘nodes’ – thus the reference to postcode pricing (incidentally there are 124 postcode areas in the UK).

As a stakeholder-led business, and the transmission network owner in the north of Scotland, we have an interest here – any uncertainty for future renewable growth, translates as uncertainty for critical network investment. Such uncertainty also increases the risk for renewable developments ultimately increasing costs; in the current energy and cost of living crisis, policymakers should be focused on providing stability and investor confidence to keep imperative costs of a capital-intensive energy transition at a minimum. In the context of decarbonisation this provides challenges at a time when certainty, accelerated delivery and a strategic plan is needed more than ever if the UK is to meet its legally binding climate and renewable energy targets at scale, pace and in the most economically efficient way.

Over the past year we have led a workstream, informed by our stakeholders, advocating for reform to the current transmission charging regime (known as ‘TNUoS’ or Transmission Network Use of System charges). Our generation customers have consistently told us that TNUoS acts as a barrier to renewable energy project delivery and that reform is needed. Our analysis overwhelmingly supports this – you can read our findings here on our TNUoS information hub. We welcome that Ofgem has announced plans for a TNUoS review in the context of net zero and look forward to participating in that process as further details emerge.

What the current TNUoS methodology has shown us very clearly is that current locational pricing is unpredictable and volatile, it unfairly skews the market and disincentivises investment in renewable generation in the places that offer the best renewable resource. These issues translate into increased costs for generators and consumers alike, with implications for securing supply chain investment in Scotland.

Our stakeholders long for stability and we have called for a charging regime that promotes optimal use of the whole system, provides stability, enables the timely and efficient delivery of net zero and, that charges recovered for the use of the transmission network are fair and just for current and future consumers. We strongly believe that any market reform must consider these principles. Altering market design to increase stark locational signals, through LMP, raises questions surrounding what is the best means to deliver significant decarbonisation at the least cost to consumers, given that we know we need substantial critical renewable development in the north of Scotland to support GB in reaching net zero targets. We agree with Scottish Renewables that further evidence and thought is required, not only on nodal pricing but on all charging alternatives that support the transition to net zero.

So, will LMP help or hinder net zero? Given the concern raised by our generation customers, and building upon our work on TNUoS reform, we plan to explore all areas of TNUoS and market/charging reform holistically. Continuing a stakeholder-led and evidence-based approach we will be considering what positive and practical changes can be made without focussing on a single solution. However, it is clear we must act now and not add further complexity and inefficiencies that will prolong the change that is needed. We must fix the current issues of TNUoS and we must all work towards reaching the same goal of combating climate change. We hope to share further detail on our analysis in due course. In the meantime, if you’d like to share your views with us on LMP, we’d welcome your thoughts. You can get in touch with us here: transmission.stakeholder.engagement@sse.com