Under both Labour and the previous Tory regimes, serious consideration has been / is being given by DESNZ & Ofgem to the introduction of zonal (wholesale) pricing of greater or lesser granularity. Maybe it'll be a handful of regions with separate mini-markets at the wholesale level, maybe it'll be a serious plethora of pricing nodes, with nothing that could be termed a 'market' at each.
[To recap: right now there is a single wholesale pricing zone across the whole of GB (not NI) - essentially, the whole of the national grid HV transmission system is a single trading point. This doesn't mean that all bilateral trade in the UK takes place at the same (half-hourly) price: but there is a single, transparent 'settlement' price for each half-hour, arising out of open-market commercial activity, that is an absolutely vital marker for any number of other commercial applications - settlement of forward deals (many of them representing essential hedging activity); basis of CfD subsidies; basis of 'index-related deals' for companies that want to be exposed to spot market prices (there are some); etc etc. Open markets for commodities cannot exist without such things, even if the design of each market is strikingly different in detail. The market we're sketching here looks not at all like, say, the spot market for Brent Crude: but they both have the same essential features.]
Why might there be pressure for change to a more fragmented set-up of regional-or-even-smaller mini (/micro) markets?
The argument is essentially theoretical, albeit based on experiences elsewhere. Its most vocal advocate is Octopus, the UK's largest energy supplier (with tentacles in all manner of other sectors). We might explain it by analogy with postage stamps. Whether I send a letter to someone in the same town, or to Inverness, the stamp will cost the same. Is that in any way reflective of the costs and dynamics of the post? Patently, it is not. Why shouldn't postal rates be properly cost-reflective? It would surely make for efficiencies. If you wanna live in Inverness, well, there you go. It doesn't take much to make the cross-over analogies: if you are determined to build your windfarm in the North of Scotland, why should you get paid for getting your electricity into the GB-wide market at the same wholesale price as if you have a windfarm close to the 'centre of gravity' of GB electricity demand where your product is actually needed? You sure as Hell cause a lot more problems for the Grid. Hence the idea of moving, at least to regional wholesale pricing, if not pricing at an even more granular 'nodal' level.
Oh, and for completeness, those advocating such changes say "it'll be cheaper for everyone in the long run". That's a big leap of faith, though, because although there might (possibly) (in the long run) be an overall system gain from efficiency, the distribution of that gain is unlikely to iron out the positions of the winners and - more significantly - the losers, of which more below.
From first principles, other things being equal I am a big advocate of cost-reflective everything - you need accurate cost / price signals in order to know what's going on in economic life. It's a matter of policy if you subsequently decide to subsidise those 'losers' deemed to be horribly disadvantaged by this, and unable to rectify matters themselves by reacting rationally to those signals. That should be the exception, of course, because the aim is positively to incentivise rational responses!
But there are other considerations than efficiency, and I'll highlight two. The first is political: the great cry of "postcode lottery" goes up - you can hear it already - there being, errr, winners and losers on a geographical basis, with corresponding heartfelt loser-lobbies, and locally-based politicians to heed them. That includes residential energy users, but also electricity generators.
The second is Liquidity. For markets to function, there must be liquidity: it's of paramount importance - a big topic, but for those who don't know why this is so, we'll hold a tutorial another day. How big (in economic terms) does a region need to be before one can be certain of enough free-trading commercial activity to constitute a liquid market? There's no precise science, and a lot of ignorance in play. Yes, we can point to some apparently much smaller electricity markets than GB's, where there seems to be adequate liquidity. But sometimes these turn out to be not genuinely separate markets, but rather 'branches' of the same 'tree'.
All I would conclude with is this: the current GB market[1], with the rather blunt, non-granular price signals it sends, may not be quite as efficient as would be ideal, but it is liquid (some say, 'indeed - but only just') and that's a precious thing, not to be taken for granted or tampered with lightly. If blundering, incomprehending hands break this thing - and Miliband / DESNZ / Ofgem-as-currently-led[2] are just the poeple to do that - it'll be a disaster. I'm not in the thick of the current market-design dynamics, but I sure hope they know what they are about.
ND
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[1] I had a hand in the design of the original manifestation of the present market (2001), though there have been many modifications since. You'll accuse me of pride and undue sentimental conservatism? Fair enough! But I know what the dangers are.
[2] There have been previous Ofgem regimes - and before that agency came into being, its predecessors 'Ofgas' and 'Offer' before it - that were truly excellent. The present management is sub-standard.
16 comments:
"Its most vocal advocate is Octopus, the UK's largest energy supplier (with tentacles in all manner of other mp will cost the same."
Para 4. Something got dropped?
Argh, yes. Will try to recreate. Check in the morning! Will use different colour.
"From first principles, other things being equal I am a big advocate of cost-reflective everything - you need accurate cost / price signals in order to know what's going on in economic life. "
Does that include making the intermittent power suppliers pay for the cost of their backups?
Article on T Worstalls blog about this a couple of days ago.
https://www.timworstall.com/2025/02/its-not-a-wholly-useful-system-is-it/
Commentators seem to conclude that as they knew before construction of the subsidy farms off Scotland that the infrastructure to conduct the electricity South, didn't exist, it was a fraudulent exercise from the outset
Sobers - categorically, yes! And in so many other aspects.
Great example: here's a nonsense sentence from the Graun's precis of today's CCC *advice* (7th carbon budget)
"New nuclear power stations, small or large, are also likely to be needed, despite costing many times more than renewable sources."
OK, so if both are needed in combo, the 'cost' of renewables isn't low!
Just checking; this is "Assessment of Locational Wholesale Pricing" from October 2023, right?
Yep. But that 2023 doc was just a milestone along the tortuous way.
The big, dirty secret (which no-one is currently ‘fessing up to, but it’ll all have to come out in the end) is that we’re going to be faced with a no-choice option of — in situations of low generation from renewables and high (or higher-than-available-capacity, anyway) — having loads forced off the grid through draconian, erm, “price signalling”.
This zoning of the grid is just an enabler to do it with more granularity and (ah-hem) “more fairly”.
See my more detailed comment below, but there is another option to deal with all that pesky load when there is low generation output from renewables…
Load shedding doesn't address the line voltage stability problem with renewables.
Clive, Matt - a great job-creation scheme for NESO & the Grid though, eh?
But are they technically 'good green jobs' ..? (c) E Miliband 2024
What do you reckon on the CCC 7th carbon budget, ND?
Oh great, let's jack up the price for poverty stricken isolated regions - like Inverness. Let those folk up sticks and move to London where postage stamps are 2p and leccy 1p/KWh. Houses, jobs etc etc are not like potatoes - chuck them in a lorry and move them to a better market.
My days in marketing are long long over but the civil servants back then did seek 'an orderly market'. A bit fusty for some but they were experienced and knew politicians for fools and knaves. But we consultants had 'Market Testing', 'A Review', 'Get rid of X' all glittering proposals to offer. Which is very handy for Miliband, he is under pressure, has no tech miracles and could do with the illusion of action and change. No longer a rainmaker, just a rain cloud.
What is good for Octopus is not necessarily good for UK plc or that oft unconsidered lobby - Joe Public. Beware of lobbyists and politicians bearing gifts.
Overall we should make a little less 'Green' effort than say France or Germany or the USA. Just so we can say we are trying but don't waste money or effort. In the end technology is unlikely to save us on a world wide scale. The Donald's mates will be all right and perhaps Xi's mates too. For the rest 'Human Overload' will need a trip switch.
Anon, I can't tell whether you are joking abt Inverness - but of course, being where all the wind-power comes from, some of the cheapest electricity of all would be enjoyed there! (plus or minus some balancing charges when the wind ain't blowing)
But, yes, more expensive post ... I know which would impact the average household more
What you suggest in your last para has long seemed to me to be the pragmatic political approach
Well, China are still burning coal and oil like it's going out of fashion, in order to make all the electric cars/solar panels/wind turbines for us.
To think that less than 60 years ago, we were making things while they were smashing things.
https://en.wikipedia.org/wiki/Cultural_Revolution#Destruction_of_the_Four_Olds_(August%E2%80%93November)
A story from my youth: a lad on Shetland is completing a form to apply for a Civil Service job. He meets "What is your nearest mainline railway station?" He writes "Bergen".
It may not be literally true but is metaphorically true. The yarn might have been instructive for all those loonies and crooks who got us into this absurd regime of having windmills hundreds of miles from their customers.
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