GB wholesale electricity market reform: impacts and opportunities for Scotland

This study assesses the likely impact of an electricity pricing model known as locational marginal pricing (LMP), as well as its potential alternatives, in the context of the Scottish Government’s Draft Energy Strategy and Just Transition Plan ambitions.

LMP is a component of the UK Government’s ongoing Review of Electricity Market Arrangements (REMA) and could significantly impact Scotland’s energy landscape.

The assessment is based on a literature review and engagement with an expert advisory panel, including members from across the energy industry. The study was conducted between September 2023 and January 2024 and the assessment is based on the literature available at the time.

Under LMP, the national wholesale electricity market would be split into several smaller areas. This creates the opportunity to provide different local price signals that incentivise the optimal siting of generation, demand, and flexibility across the areas. Such incentives can improve the utilisation of renewable energy, reduce the need for network build and reduce costs.

Additionally, variations in price provide flexible assets with locationally specific dispatch signals. This encourages these assets to adjust their consumption or generation to match local grid requirements, further reducing system costs. However, LMP creates significant uncertainty for market participants and could discourage investment in some low-carbon technologies in different parts of GB.

Findings

• Without insulating mechanisms, LMP would heighten price risk (£/MWh sold) and volume risk (MWh sold) for Scottish renewable generators. Delays to transmission network build would exacerbate this. Elevated risk could increase the cost of capital for new developments, potentially negating the modelled system benefit of LMP. Renewables support mechanisms could help mitigate disruption to Scotland’s renewables pipeline, reducing UK decarbonisation risks. Wider benefits of the green economy in Scotland are closely tied to the continued buildout of renewables.
• Studies suggest that, due to the significant existing capacity of renewables, Scottish consumers could benefit from some of the lowest wholesale power prices in Europe under LMP. Conversely, as LMP creates regional differences in price, some GB regions would see increases in prices. The extent to which this materialises depends on policy design and the pace at which LMP is implemented. The impact of LMP is reduced the later it is implemented as the network is reinforced to 2035, reducing transmission constraints.
• LMP is unlikely to accelerate the decarbonisation of the power sector. LMP could even slow decarbonisation down by causing a hiatus in investment if implemented without sufficient mitigations demonstrating that renewable support can be maintained. However, the potential to improve system efficiency could decrease the cost of the UK power system between £0.2bn-1.6bn annually. In Scotland, lower wholesale prices could reduce the cost of electrification of sectors such as transport, heat and industry, and could play a part in attracting new industries and green hydrogen production.
• LMP has the potential to encourage the efficient location and operation of assets that provide flexibility to the electricity system. Due to significant capacity of renewables in Scotland, LMP could attract further investment in flexible assets. This would help to reduce network congestion in Scotland, allowing for greater penetration of renewable generation. However, strategic planning is necessary to ensure that Scotland receives the network capacity required for further development of renewables.

Further details can be found in the summary report, which provides a non-technical summary, and in the full report.

If you require the report in an alternative format such as a Word document, please contact info@climatexchange.org.uk or 0131 651 4783.