Nodal Pricing - an imagined discussion

The coming scale of change in the electricity market is without precedent. Not just physical changes in the infrastructure, but also fundamental market rule changes that will impact all sides in some form or other over the coming years.

Below is an imagined light-hearted discussion between different sides of the market on some of the changes associated with locational nodal pricing and changes to the electricity market. More of a daydream than anything that would happen, as it seems to be case that everybody impacted is never in the room at the same time.

The issues to be resolved are many, and complex - it will be hard to come up with an answer that satisfies all sides; but considering the impacts will be crucial.

The entirely fictional discussion is below...

System operator ???????????

These constraint and balancing costs are too high, what can we do to reduce them?

Intern????

How about build more wires to get the electricity to where its needed?

?…(Silence)…??????

Regulator????????????????????????

Yes, constraint costs are too high, what is the best econometric solution.??We also need to be ready for the coming swathe of renewable generation to make sure the market will work to support it properly.?How can we do that?

Economist???????

Well you could set prices in local areas.?That would provide signals to areas with too much or too little generation.?This Nodal Pricing would create an economically sensible system with signals to build new generation where it is nearer demand.

We could also set prices on a totally different basis by making sure that renewable generation isn’t paid the same way that fossil fuel generation is.?It would mean several linked but separate markets.

It would involve a complete system redesign, take several years and create a number of new markets; but would make sure all the right signals were sent to all parts of the market in real time to make sure optimisation was the most efficient possible…?(whispers) based on the assumptions we make.

Intern?????

Would building more large-scale nuclear generation and less small scale renewables make any difference?

?????…..(Silence)…..

Politician??????

Nodal markets sound like doing something clever and levelling up.?Will this make prices lower?

System Operator??

It will reduce constraint costs, and prices in some areas but….

Politician ?????????????????????????yes or no

Regulator???????????????????????err…..yes.

System Operator?????

If we make it centrally dispatched as well it will make it more efficient.

Tech guy?????

This sounds like it could be really big data and need massive computing power to do all the calculations and deliver complex products for customers.?Complexity is great, lets do it.

Regulator

This sounds like a great idea that will make the market more efficient and cheaper for customers.?Who will be responsible for making it happen?

Politician??

Lets put an obligation on suppliers, makes our lives easier.

Supplier????

I’m busy installing smart meters, dealing with half hourly settlement and surviving the price crisis I haven’t really got time to think about this properly.

Investor?A ??????????????????????So if I build a new asset in location?X how will I be paid?

Investor B ???????????????????????

How will my existing asset in location Y be impacted? What will happen to all my existing contracts?

Regulator?????????????????????????You’ll probably be protected against the risk.

Trader???

So how will liquidity be impacted??Churn is already low, and is likely to reduce if the zones are smaller??How many hubs are there going to be?

Supplier????

How will I hedge the energy I need to supply customers, how large will the risk premium be (if I can hedge at all)? What will happen to all my long term contracts?

Customer A??????

This is all very complicated.?How much lower is my monthly bill going to be, I’m really struggling at the moment?

Customer B???

I’ve got solar panels, a battery and EV will I be able to get paid more?

Customer C??

Hold on, I’m doing the same thing I was 5 years ago, why will I pay so much more rather than the generators that are causing the problem?

Politician???????

Yes yes – everybody will benefit.?We’ll work out the details later.

Customer in Scotland

?This is great, my energy costs will be much lower if I'm nearer the generation.

Customer in England?

This is terrible, how can I be paying for the costs of subsidising generation in Scotland and not getting the lower cost of it?

Tech guy

I love this, its brilliant – so much complexity and opportunity for me.

Investor ?

My investments going to be impacted by all this, I think I’ll need to make higher returns.

Trader??????????????????????????????I’m off to trade something else.?Hasta la vista.

Major business owner??

So I could get cheaper electricity if I moved my business to Scotland? Great, although I don’t think that’s practical, so I’ll need to just pay more I guess, or maybe go overseas if I’m disadvantaged even more in the UK.

Politician??

Postcode based pricing is wrong, we can’t have English customers subsidising Scottish.?We need to put in place something that does not give advantages to customers in one location over another.?We also need to make sure that all customers pay similar prices; while at the same time making sure Investors are incentivised correctly.

Regulator?????

You’re right, we’ll come up with a mechanism to smooth out the costs across the market.

Consultant?

Let us help you design all of this, it should only take a couple of years with a large enough team.

Customer A?????????????????????what is my monthly payment again?

Customer B?????????????????????Where’s the tech guy, I need him to make this work.

Customer C?????????????

I’m off to cut down a tree and open up my indoor chimney.

Supplier???????????????????????????Aaaaaaaaahhhhhhhhhhhh

Investor???????????????????????????This is too complicated, I’m off to another country.

Politician???????

The electricity market is too complicated we need something simpler that works for customers.

Regulator?????????????????????????How about we have an electricity pool?

Intern??

Yes I read about that, I think there was one of those before I was born.?How did it work again?