Johnny took the opportunity to argue the case for progressive reforms within the existing market structure – rather than radical reforms that could put vital net zero investment at risk. We have pulled out his key points below.
Investment risk
In his opening statement Johnny highlighted industry concerns around the scale of the change presented by a shift to locational marginal pricing: “a change of this nature coming in the middle of a net zero transition when our main priority is to raise investment and to push ahead towards a net zero power system by 2035 would be unwelcome.”
He also raised the opportunities that exist to enact progressive reforms within the existing market arrangements and the importance of properly considering this as a fair counterfactual: “it’s important that we realise that no assessment has been made against what we could do by progressive reforms within the existing market arrangements. [Our] key message is [that] we need to get strategic investment in networks aligned with a net zero investment plan for energy.”
Exposing the consumer to locational signals
Much of the debate focused on the extent to which consumers should be exposed to locational pricing, and whether the wholesale price is the correct avenue to do this, with Alexander Stafford , MP for Rother Valley, asking: “There’s always going to be winners and losers – who are the losers in this situation?”
Johnny drew attention to the heart of this question: “We all agree that we need to harness the power of flexibility from the consumer, it’s a question of how we do that. Do we build that into the wholesale price or do we use other means of doing that?
And the opportunities for reform within existing market arrangements: “To be clear, the LMP price signal is primarily driven by the occurrence of network constraints… We think, rather than building that price signal into the wholesale price that affects everybody, it would be better using tools and markets that are available today – such as the Balancing Mechanism, flexibility auctions, local constraint markets – to send those price signals directly to those consumers that can best respond to them.”
Mark Pawsey, MP for Rugby, questioned “A postcode lottery isn’t great – why should one consumer be paying a different price to another because somebody has decided to put them in one zone rather than another?”
Johnny responded “It depends where you’re connected to the network, not the postcode. Is there a level of constraint on the network and is that constraint for generation or for demand? To be clear, that position will change very rapidly as we go through the energy transition, as we build more capacity as we bring in more demand and generation. You may be sat somewhere thinking ‘this looks like a good thing for me right now’, because generation is constrained nearby right now therefore I benefit from low cost energy, then someone might build a new interconnector and all of a sudden that balance changes. The question is, do we want to expose all consumers to that via the wholesale price, or do we want to those consumers that are able to respond to that through flexibility markets?”
The levelling up agenda
The Right Honourable Viky Ford, MP for Chelmsford, asked about the consumer benefits of hosting generation nearby: “Do we need to change the law to enable [local communities to benefit]?”
Johnny highlighted the potential of charging reform to address this: “if you’re sat next to a nuclear power station, you could live a kilometer away and you would not benefit from cheap energy if that power station is not constrained… There’s lots of ways we could support [levelling up]. In particular, the way we do charging [means] it’s very difficult to avoid paying for all charges just because you’re using local energy. That’s a much better way of doing levelling up as you’re targeting where you want the benefit to go, not where there are network constraints which is the happenstance of historic investment.”
Interconnector reform
Finally, Johnny raised that the committee should explore options for interconnector reform: “interconnectors are not working for us at the moment – we cannot wait seven years to implement LMP. The committee could recommend to government to look specifically at interconnectors… The System Operator does not have the tools in order to affect the flows and capacities.”
Regen was invited to provide additional supplementary evidence following this event – if you would like to feed in to this, or to find out more about our work in markets reform, contact jgowdy@regen.co.uk or ebrundrett@regen.co.uk.