As the debate around the role of locational signals in the GB power market continues, one of the fundamental changes to market design would be a move to Locational Marginal Pricing (LMP).
A number of reports have considered the nature of its benefits case, including our own. The implications of a move to LMP are wide-ranging and likely to be controversial. Any assessment of LMP must be comprehensive and transparent.
The most prominent piece of quantitative analysis, commissioned by Ofgem, has been completed by FTI Consulting. FTI estimates there are significant benefits associated with a move to LMP, which may create the impression that the case for LMP is clear-cut.
Now that FTI’s work has been completed, we have produced a report that reflects on their final analysis and conclusions and set out considerations for policy makers who are looking to assess the case for a move to LMP.
Frontier illustration of ‘Locational pricing assessment in GB: Final modelling results’, FTI, July 2023
We have identified a number of concerns related to the approach taken by FTI: because of choices made in their modelling, their claimed benefits are likely to be very significantly overstated and should not form the basis for decision making.
- FTI focus on a scenario with £24.5bn of system benefits, when its own sensitivity analysis shows significantly lower benefits of £14.4bn (a reduction of 41%) when taking account of the now approved Holistic Network Design (HND) investment plans.
- FTI incorrectly ascribes system benefits associated with optimised dispatch and optimised investment to the implementation of LMP.
- FTI’s claimed customer benefits of £50.8bn, underpinned by significant value transfers from producers to consumers, are overstated.
- FTI gives limited consideration to the potential costs of LMP e.g. downplaying the risks of increases in investor cost of capital.
- FTI’s analysis does not consider wider policy design.
- FTI’s results are not robust to different assumptions and are not conservative.
FTI’s analysis does demonstrate that optimising the location of investments, and dispatch of domestic and international sources of supply and demand, can lead to substantial consumer and system benefits. This implies there is significant value that could be captured through incremental market reforms.
Click here to read our report, or download below.
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