In Regen’s latest insight paper, our markets team provides a broader view of how locational signals operate today and how they could be enhanced, reformed and refined to meet the challenge of a net zero electricity system.

Much of the current market reform debate has centred around the importance of strengthening locational signals, which are vital for both long-term investment decision-making and operational efficiency for generation, storage and flexible assets when participating in electricity markets.

To date, the focus has been on creating new locational signals within the wholesale markets, delivered via a locational marginal price (LMP), based on either nodal or zonal pricing locations. However, our conclusion is that, while reform is certainly needed, there are several opportunities to deliver more effective locational signals by implementing reforms that are largely within the existing market arrangements, within a relatively short delivery timeframe.

Regen’s recommendations:

For Ofgem:

1. Reform network charging (TNUoS) to provide a long-term investment signal for generation that is cost reflective, transparent, stable and consistent. A review of the signals directed at demand should be undertaken in tandem, ensuring that fairness is considered as a key criteria.

2. Continue to reform network connection and queue management processes so that there is a consistent and integrated process between locations and across network voltages. At the same time, continue the shift towards more strategic and anticipatory network and system planning and investment, to direct the market to invest where assets are needed.

For the Electricity System Operator (ESO):

3. Improve and enhance the operation of the Balancing Mechanism (BM), through digitalisation, IT investment, forecasting and market development, so that it becomes far more adept, efficient and competitive. The objective should be to reduce balancing and constraint management costs by making best use of low carbon generation and flexibility.

4. Alongside the BM, work with Ofgem and the Distribution Network Operators (DNOs) to continue to develop operability, flexibility and local constraint management markets/services that will enable the utilisation of a wider range of assets and resources and to pre-emptively manage constraints. This would allow markets to send a stronger locational signal for flex providers and investors.

For the government:

5. Harmonise planning policies to ensure alignment with the UK’s net zero targets. Empower local authorities, city regions and devolved governments (e.g. through Local Area Energy Plans, Regional System Plans and other local strategic energy system planning) to have more decision-making agency to send stronger local and regional signals as to where infrastructure, low carbon technologies and system assets are required.

6. Retain the existing integrated GB wholesale market and seek ways to provide effective locational siting and operation signals via solutions and enhancements within the existing market structure, avoiding the risks associated with shifting to a radically new market design.

Read the full insight paper here.

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