Beyond the optics | A network charging solution for the future

After the government recently confirmed it is still considering zonal power pricing as part of its Review of Electricity Market Arrangements (REMA), Joe Dunn, head of grid and regulation at Scottish Power Renewables, sets out their proposed alternative for getting renewables built in the right place.

The government’s publication of REMA confirmed it was progressing its review by assessing zonal locational marginal pricing (LMP) and alternatives that together would deliver these benefits. At Scottish Power, we have a ready-made option for an alternative to the siting benefits of LMP … OpTIC (Optimised Transmission Investment Cost).

So, let’s rewind to how we developed OpTIC.

As we all know, to achieve net zero, we need large amounts of transmission network investment and there’s been lots of discussion within the sector on how to charge generators and suppliers for use of that network.

Those discussions have focused on ensuring that any methodology works best for the network of the future: one that’s dynamic, flexible and dominated by intermittent generation.

Over the last 20 months or so, a TNUoS (Transmission Network Use of System) task force has been making incremental improvements to the current transmission network charging methodology as an interim solution to volatile and unpredictable charges until a more enduring option is developed.

More radical market reform options such as LMP (being considered in REMA) could make locational TNUoS redundant. LMP is based on pricing the value of electricity at a specific location and time depending on local factors including levels of generation, demand and network availability.

The theoretical concepts of LMP are favoured by economists. However, this is a major transformation and, in our view, the level of uncertainty LMP is likely to cause will increase investor costs and fail to deliver the suggested benefits.

At a time when the focus should be on encouraging the investment required to meet net zero, we’ve developed an alternative approach – with Trident Economics – that we believe aligns transmission charges with long-term network development plans and accounts for the locational value of electricity, similar to LMP.

We looked at the long-term plans for building the economic and efficient network of the future and asked: What if transmission charges were linked to both the long-term plans for network build and incorporated the concept of the value of electricity from LMP?

In other words, what if users were sent incentives to locate based on how the most economic and efficient system was being developed and the value of electricity in that system?

So, we came up with OpTIC, which basically takes the best elements of current transmission charging and some elements of LMP to incentivise users to locate alongside the future planned network, making it economic and efficient, and maximising the value of electricity within that system.

How does it work?

Developed by Scottish Power Renewables, OpTIC is a methodology for setting network charges based on the value of electricity in different locations in the optimised planned future network.

It is essentially the current Network Options Assessment with an add-on that produces an optimised zonal charge by calculating the difference between revenues under a single national market price and a local marginal price.

OpTIC offers the siting benefits of LMP without the associated (more than five year) implementation challenges and investment uncertainties by replicating these siting signals of LMP in an optimally designed network.

OpTIC determines network charges based on the value of electricity in different locations. It does this by modelling the dynamic signals that LMP would produce with an optimal future network, averaged over time to provide an annual charge. The optimal network is important – it means users are not exposed to delays in network build over which they have no control.

And it’s timely – not only does it address most of the issues under discussion by the TNUoS task force; it also helps respond to most of Ofgem’s strategic challenges and provides a building block for government when developing alternatives to the benefits of LMP. A real win-win.

If industry, government and the regulator collectively recognise the ESO’s network plan as the ideal future GB electricity network – a single version of the truth if you like – then, our proposal to charge based on that network is intuitive.

And if, by reducing the risk to investment, we work as a sector to deliver OpTIC, we can get on with building a cleaner, greener, better, net zero future – quicker.

That’s what we’re committed to doing at Scottish Power and we’ll be sharing that vision – and our OpTIC proposal – at an upcoming National Grid ESO Connection and Use of System Code Panel.

Watch this space.