Hyper-local wholesale power pricing has been ruled out by government officials working on electricity market reforms, Utility Week can reveal.
Sources close to the long-awaited review of electricity market arrangements (REMA) have indicated that nodal pricing, a form of locational marginal pricing (LMP), is “off the table”.
Instead, Utility Week has been told that the next stage of the exercise would focus on two options for wholesale market shake-up: the introduction of zonal pricing and more incremental reforms to the existing system.
These reforms could include changes to the transmission network charge regime and extensions to the balancing mechanism, Utility Week has been told.
The Department for Business, Energy and Industrial Strategy (BEIS) published an initial consultation in mid-2022 on REMA, outlining ways of overhauling the wholesale electricity market to make it more fit for purpose in a less centralised and increasingly intermittent energy system.
There has though been no public progress on the exercise since the department published responses early last year.
Energy ministers promised a follow up consultation last autumn, narrowing down the wide-ranging number of options outlined in 2022, but this has not yet been published even though it is understood to have been written already.
Multiple sources have told Utility Week that the Department for Energy Security and Net Zero’s (DESNZ) REMA team has briefed companies and industry bodies, which took part in consultation workshops on the exercise.
The proposal to introduce nodal pricing, which would break up the national market into hundreds or even thousands of nodes with their own wholesale prices, has bitterly divided the electricity industry.
Advocates argue that it is more fit for purpose than setting wholesale prices nationally, partly because it will encourage high energy users to locate closer to where renewable electricity is generated and cheapest, therefore reducing the need for costly grid upgrades to transport the power elsewhere. Backers of nodal pricing include the Energy Systems Catapult, National Grid Electricity System Operator and Octopus.
However critics, including many of the leading renewable generators such as RWE and Scottish Power, counter that this kind of radical reform will take years to implement and disrupt investment in their sector with knock on increases in the cost of capital pushing up bills.
Other concerns include political worries that nodal pricing would result in postcode lotteries with consumers paying more for electricity in some parts of the country than others.
Zonal pricing, which would break up the wholesale market into a smaller number of regional zones, is seen as a less disruptive option, while not delivering the same level of transparency as nodal pricing.
Countries that use zonal pricing include Italy, while nodal pricing has been rolled out in California and Sweden.
Johnny Gowdy, director of consultancy Regen, said: “It’s not going to happen. We’ve talked about it for two years and there’s no consensus that it’s the right thing to do. It’s time to move from endless discussion about changing the market towards what we can do with existing market arrangements.”
A DESNZ spokesperson added: “We are considering a range of options and incentives to better match where energy is generated and used, helping to ensure a fair deal for consumers.
“No decision has been taken on whether to introduce locational pricing. We continue to work closely with industry and stakeholders to develop and refine options for reform, ahead of a further consultation expected shortly.”