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Locational Pricing – a wrong turn for our flexible grid of the future

The UK is on a mission to transition to a fully decarbonised power system by 2035, as part of the overall strategy target of net zero greenhouse gas emissions by 2050. It’s a topic encouraging much debate and our Head of Grid and Electricity Regulation at BayWa r.e. UK Graham Pannell was invited to give evidence to the UK Parliament Energy Security and Net Zero  select committee for the Government’s inquiry into a Flexible Grid for the Future.

Graham will continue to contribute to the debate, talking about how the grid should develop to carry the UK’s renewable energy transition to net zero. In this article Graham outlines one of the key topics up for debate …

In light of the Flexible Grid for the Future inquiry and the publication of the second REMA (Review of Electricity Market Arrangements) consultation, one of the key areas of debate that’s hitting the headlines is locational pricing. But what does it mean and why does the debate matter? Is it distracting from the priority of net zero or is it part of the transition journey for the UK?

What is locational pricing?

Locational pricing is based on the idea that there would no longer be a single national price but instead where you live will determine how much you pay for your energy; it’s a provocative topic.

Now, in GB as in so much of the world, there is a national market price for energy. Pricing is based on matching up the cheapest available generation to the demand for electricity in every hour. Separately, there are location-based network charges added on top, to cover the cost of the nation’s grid, and for the movement of energy around Britain from places like Scotland to more heavily densely populated cities like Birmingham.

Sometimes, energy can’t get to where it’s needed, because for example there just isn’t enough grid to carry it. In this situation, the national system operator steps in to rebalance the grid – normally turning off some generation in the constrained area and turning up more costly generation on the other side to make up the difference. This is the so-called constraint cost.

Many renewables advocates propose accelerating grid build, especially at known pinch-points, to maximise access to clean, low-cost energy while reducing constraints. However, advocates of locational pricing believe that low prices in often-constrained zones would be better to discourage renewables, especially wind, from building in those zones and that instead more generation will build nearer people’s homes and industrial centres, to mitigate constraint cost.

Under locational pricing, for example in Scotland, with the best and most consistent wind resource in Europe, energy prices would be momentarily much lower when it’s windy – such that new wind farms may not be built there and older wind farms may even close early, as these prices may not cover the generators’ costs. Importantly, domestic customers will still have to pay fixed network and retail costs, including the dreaded standing charge, and the new mix of generation triggered by locational pricing may be even more expensive overall. Heading in-land, to somewhere like London or Birmingham where wind farms aren’t the norm, and energy tariffs would be much higher.

But why is it causing such a stir?

There are arguments for and against locational pricing for all manner of reasons.

Advocates say locational pricing would provide more optimal dispatch, as generation and demand users (those who can) would turn-up or turn-down in line with the locational price differences, resulting in lower constraint costs. They especially point to interconnector cables to neighbouring countries, which they say need a locational price to avoid making internal constraint costs worse. Some studies also suggest that new offshore wind farms would, with locational pricing, be unlikely to build in Scotland or the North of England, instead relocating South, off Cornwall and East Anglia.

Advocates point to existing implementations of zonal pricing in the Nordic countries and Italy, although critics will point to restricted growth in renewable energy there.

Critics say this proposal is highly impractical - you can’t readily build wind farms in Reading and Birmingham, for example, and solar power needs no push to head south. Also, the majority of businesses and residents aren’t all going to be able to pack up and move to another location for a contested promise of reduced bills. Locational pricing would be an energy tariff postcode lottery. So where’s the fairness?

Furthermore, the inherent volatility of locational pricing comes with a cost – investors will set a higher bar for new generation, meaning that the new electricity generators will be more expensive. With up to £375 billion of new GB generation capacity expected in the next ten years, only a small change in perceived risk could add up to a huge extra cost for bill-payers.

Critics also point to higher carbon emissions from locational pricing – while wind farms have limited ability to move, gas peaking generation could most easily locate in higher-priced zones, meaning GB is more reliant on fossil-fuels for longer. There are further costs, as some renewables move to less efficient locations, meaning more turbines and more panels are needed to produce the same amount of energy.


A cheaper way of reducing constraint cost and getting the flexibility benefits of interconnectors is actually to build out the grid, to invest in the right amount of network infrastructure.

Dr. Graham Pannell, Head of Grid and Electricity Regulation at BayWa r.e. UK

Is locational pricing the right move for GB?

What can the Government do to deliver a flexible grid system that works? Locational pricing is being tabled as a route to achieving flexibility with net zero transition as a driver; although to hit it, fossil fuels need to be burning less, not more.

Rather than ripping up the current market price arrangements and making new generation more expensive, a much cheaper way of reducing constraint cost and getting the flexibility benefits of interconnectors is actually to build out the grid, to invest in the right amount of network infrastructure. This is why the work of the Electricity Networks Commissioner is so important, and why the Government’s ambitious Transmission Acceleration Action Plan, which seeks to radically speed up nationally significant network delivery through plan-led reforms and greater public engagement, is a critical step on our journey to net zero emissions.

But even as new transmission network is under development, there are other means to minimise costs and accelerate the growth of renewable energy. Arrangements to re-dispatch or counter-trade energy flowing across interconnectors can be significantly improved within the current national pricing arrangements. The tools which the system operator uses to tackle constraints can be expanded, widening the pool of participants and the timeframes of constraint management products, using better forecasting and regulating against undue market power. One great example is the recent Constraint Management Intertrip Scheme, which boosts export capacity from Scotland to England by over 800 MW, for a very small cost of a handful of emergency disconnection facilities.

Outside of locational pricing, REMA also offers up other solutions for a more cost-effective net zero journey. Reforms to generation Contracts-for-Difference which remove barriers to better market participation are welcome, as are reforms to Capacity Market which facilitate and encourage low-carbon flexibility.

In parallel, the system for levying transmission network use of system charges in GB requires a fundamental overhaul, to align with future spatial energy planning and to facilitate a renewables-dominated electricity system – a major subject in itself and probably requiring its own inquiry!

What happens next?

The second consultation on REMA closes in May, after which the Government will further narrow options and set the direction of travel for a number of issues within the whole package.

Further reading:

Regen (23rd Feb 2024) Written evidence to ESNZ Select Committee on LMP and progressive market reforms

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