INTERVIEW: UK at locational power pricing tipping point: Electron

The UK is at a tipping point in energy policy with locational pricing of electricity an urgently needed and increasingly likely outcome, Electron CEO Jo-Jo Hubbard told S&P Global Commodity Insights July 14.

The government is undertaking a comprehensive Review of Electricity Market Arrangements, with reform options due to be set out this summer.

One option is for nodal pricing, dividing the national network into different intersections, each with its own wholesale electricity price that reflects the cost of supplying electricity at that location. Moving to a locational pricing system would require legislative and regulatory reform.

"This time it feels like it is actually going to happen -- maybe it will take several years to implement, but I think a move to nodal pricing has enough momentum to get over the line this time," Hubbard said.

"We're at the point now in a developed economy where people really can't pay their energy bills. It is becoming unthinkable to be wasting GBP2 billion a year on balancing costs. This is the tipping point because of public awareness of energy prices," she said.

Orkney test case

Introducing locational pricing was a first essential step to Electron's local energy marketplace model, where consumers are paid to use power during periods of local surplus, Hubbard said.

This it achieved in a trial on the Scottish island of Orkney, where wind farms were encouraged to pay consumers to use more power, avoid curtailment and so limit revenue losses.

Use of electric storage heaters with telemetry in Orkney homes aided the trial's cause as consumers did not have to proactively manage their demand.

"The Orkney demo was a snapshot of what the UK could look like in five years' time -- a windy region with 130% of its energy needs covered by renewables," Hubbard said.

Local, distribution-connected wind farms are routinely curtailed up to 30% of the time due to network constraints, with no compensation.

"We looked at available network capacity and wind curtailment, and at how much wind farms were willing to pay to stay online. Then we worked with domestic consumers to see what price they would need to be paid to use more power," she said.

For the first time a peer-to-peer, or really asset-to-asset, local energy market was able to change the physical power flows in the local grid, boosting renewable output by incentivizing local consumption.

"It's a nice example of how a system might look when flipped on its head; turning demand up to match supply, instead of supply down to match demand; reducing losses and taking pressure off networks," Hubbard said.

Curtailment markets

Now distribution network operator Electricity North West is building on the local curtailment market model, rolling out its BiTraDER project for a bilateral market allowing flexibility providers to trade directly with local generators.

"What Electron is doing is creating markets for local network capacity. If you are an EV charging hub, or a business park, you should be able to buy additional local capacity, paying consumers, factories or other businesses to use more or less power at a certain time, at a certain location. We're pushing the optimization incentive right down to the end-consumer level," she said.

Local authority role

Energy regulator Ofgem has also been advancing the concept, having recently closed a consultation on giving local authorities more power to create local price incentives.

Local markets "could play a bigger role in future" to balance supply and demand flexibly while reducing the need for expensive grid additions, the regulator said in April.

But if distribution network companies were solely responsible for these markets an obvious conflict of interest would arise, it said, because new grid capacity boosts DNO revenues.

Ofgem consulted on four alternative governance models, ranging from relatively small reforms within existing institutions -- internal separation of distribution system and network operator functions -- to the creation of regional bodies carrying out roles with responsibilities across electricity, gas and heat.

Pull factor

"There are tens of thousands of 33 kV nodes in the UK that will have constraints, to a greater or less extent, as we move to a zero-carbon electricity system by 2035," Hubbard said.

Local network capacity markets will start in windy or sunny areas, helping to ensure new wind or flexibility assets were not discouraged from being built where they generate the most power.

"You then get a pull factor, with renewable generators elsewhere refusing to accept blanket DNO curtailment without access to a market in which they can buy additional, local, temporary network capacity by, for example, paying for demand turn-up."

Detractors would say the flexibility to offset renewable curtailment is not all there yet, Hubbard said.

"But it never will be there unless you put out a price incentive first -- that will drive adoption of EVs, heat pumps, and encourage many other new, energy-intensive processes to be undertaken in those regions," she said.

More than anything, a price incentive would illustrate how a renewables-based system is different to a gas- and coal-based system.

"It is not about how much energy you consume, but when and where you consume it," Hubbard said.