We are now well into summer, and so the decision on whether to move towards implementing zonal pricing or not must surely be just around the corner.

A clear decision, when it comes, will no doubt be welcomed by investors in the sector who have been facing into uncertainty (and how to convince investment committees and corporate boards of the government’s assurances on investor protection) for an unfathomably long period of time.

Let us suppose the decision is not to go zonal. That would be a clear decision, and so surely viewed positively by investors. But in the face of major identified challenges, a decision not to do something is only half the story. It needs to be complemented quickly by a statement of an alternative plan, and why it will help. Otherwise, investors face a new sort of uncertainty: they know something is going to change, but not what that change is. And worse, investors will inevitably wonder, if there is no clear programme, whether we will all be here discussing zonal pricing again in five years. Or sooner.

Summary of the RNM reforms

Source: Frontier Economics

So meat needs to be put on the bones of the “reformed national market" (RNM), and quickly. And a plan for co-ordinated and managed delivery is required. A move to zonal pricing would establish a major programme of work across the industry, with (presumably) clear sponsorship, governance, impetus and accountability for delivery. The same is needed for the RNM, to avoid the risk of drift and incoherence which would surely arise if delivery is attempted through a set of disparate industry governance arrangements better suited to smaller tweaks.

Where to start…

A starting point is to define what the RNM reforms are aiming to do.

First, there need to be reforms which tackle issues of congestion head on. The risk of high constraint costs if investments in generation and transmission do not go hand in hand and if assets are not operated efficiently became the dominating aspect of the REMA debate. Reforms to tackle this risk would ideally cover the optimisation of investment in generation, storage and transmission on one hand, and the optimisation of operation of assets on the other. Some might address both.

Second (and so far arguably the poor cousin) are reforms which aim to improve efficiency and reduce the cost of investments which support Clean Power 2030 and the transition to Net Zero. These now need at least as much focus.

The objectives of these packages of reforms are illustrated in the figure below.

Objectives of the RNM reforms

Source: Frontier Economics

Groundhog Day?

At this point, investors who have spent more than two years mired in REMA debates may be forgiven for showing signs of distress. This could all feel like going back to the start, with years spent debating what these reforms should look like lying ahead.

But that need not be the case. The good news is that many of the reforms which could lie at the heart of the RNM programme are already underway, even if the scope of the work in some areas could be broadened. For example:

• work is already underway on spatial energy planning, accelerating the regulatory sign-off of major transmission expansions (including pre-booking of equipment manufacturing slots), and reducing other administrative barriers (such as those in the planning system);
• work has started on improving the dispatch of smaller assets and reducing skip rates, although clearly this work has further to go and is only one part of a broader set of measures to enhance DER visibility and controllability. Work on NESO-DSO co-ordination has also started, but with more to be done;
• similarly, NESO has made major changes in the way it procures ancillary services, with a raft of new products and platforms. NESO has also signalled the potential for more work in relation to locational optimisation, and a question remains as to whether more can be done outside a central dispatch framework to capture the benefits of co-optimisation;
• earlier contracting for constraints (to ensure there are more assets available to compete for redispatch) is already being piloted (e.g. Local Constraints Markets), with scope for more work to roll out more widely;
• NESO is investing in new forecasting tools in some areas (e.g. interconnector flows), though these are being implemented in a world where full control over the network is only handed over one hour before delivery. A key area for further consideration would be whether bringing gate closure earlier and enhancing the quality of information available to NESO would bring benefits. The question of whether imbalance prices should be made sharper has also been raised in this context, although given the relatively recent move to a single and highly marginal price, this does not feel as great a priority;
• NESO is also already investing in upgraded decision making tools, again potentially with the ability to go further and faster; and
• there is collaboration between NESO and TOs in relation to network availability (the need to optimise the needs of the TOs for physical network access with the resulting costs for NESO in the energy market). Given the scale of future network access needs for major capital investment programmes, this is an area where more focus is likely to be required, building on the Constraint Collaboration Project, and potentially looking across both codes (aspects of the SO-TO Code in this area arguably belong to a different era) and incentives.

It is notable that there are no major initiatives that we could identify as underway in the “wider reforms” category, potentially because these were the most wrapped up with the conclusion of the REMA process.

Areas in which reforms relevant to the RNM are already underway

Source: Frontier Economics

Building on solid foundations

So we would not be starting from scratch. Nevertheless, there are areas where new activities will be required. Some of these might deliver results in the shorter term, and some may have longer term impacts.

In relation to investment, network charging and the topic of locational signals more generally is a key candidate for reform. This needs to start with a higher level question: what is the value of locational signals for investments in the energy system we are building?

Historically the argument has always been that you send investors locational signals so that, in their choice of location, they internalise the cost they impose on the network. But in a world of strategic network planning (linked to spatial energy plans and Gate 2 connection offers linked to the capacity of the planned network), it feels valid to ask if future network costs should be considered variable or sunk (i.e. because the network will be built out as planned in all scenarios). The nearer we are to believing future network costs are sunk, the weaker is the argument for locational signals. This contrasts starkly with comments from DESNZ that locational signals should be even stronger than today.

Assuming the answer to that question suggests some ongoing benefits from locational signals, there are lots of candidates. These go from changes at the margins of ICRP, through completely different models for use of system charges (e.g. OpTIC), all the way to approaches which rely on deep connection rather than use of system charges. Since all investors (including those developing low carbon projects) are exposed to TNUoS currently, a policy vacuum in this area constitutes a major source of risk.

Linked to the question of planning is the question of offshore co-ordination. Various processes (including HND FUE) have arrived at a plan for an integrated network offshore, and a vision of where and how different generation assets connect. Some of the related network investments are being undertaken by monopoly TOs (the so-called “wet onshore” assets). Others are intended to be developed on a more commercial basis. But there is currently no single entity co-ordinating the process, and investors are being left to try to hammer out commercial deals for long lived network and generation assets in a highly regulated sector with minimal guidance. And where the regulation may not yet have been designed for the future we envisage (think MPIs, INTOG, …). Again, this may act as a significant drag on investment.

DESNZ has raised the topic of non-firm access rights, at least for storage. It may also be reasonable to think that this could be extended to other technologies. But there is little definition as to what it actually means. With any interruptible access right comes a need to define the conditions for interruption. These could be unrestricted (i.e. no firm access rights). Or they could be more limited, for example:

• interruption permitted only in certain system conditions (or at certain times); or
• frequency or duration of interruption limited (this could be used to manage investor downside risk, by limiting uncompensated interruption to a maximum number of hours a year).

The consequences of interruption also need to be thought through. Suppose a storage asset or windfarm were interruptible for a maximum of 1000 hours in a year. Investors would take a view as to expected lost profit from this interruption, and would adjust their capacity auction or CfD bids accordingly. This change would definitely remove the populist charge that “assets are being paid to turn off”. It might result in reduced customer costs overall as a result of competition relating to the impact of that 1000 hours. But if other bids are adjusted, it might not significantly reduce overall costs.

Treatment of interconnectors is also likely to be a critical area for further action. It is obvious that this needs to be done in concert with our European neighbours. Recent announcements on the UK-EU relationship may create more room for co-operation in this area, and maybe even allow something closer to the “co-ordinated redispatch and counter-trading” arrangements which now operate on many borders in the internal European market. Effective co-ordinated intraday and firm SO-SO arrangements should be the goal of this reform.

Looking at wider reforms to incentivise low carbon investments, the RNM programme should also be the opportunity to pick up where the discussion left off in relation to CfD reform, capacity auction reform and shorter Imbalance Settlement Periods. All could play a valuable role in securing more investment in the right low carbon assets.

Overview of an RNM programme

Source: Frontier Economics

Delivering on change

After the marathon of REMA, we need to take policy risk seriously. If an RNM is where we are headed, policymakers should define clearly what that means, how reforms already underway will fit, and what new initiatives are required. There is a reasonably clear consensus on what this should look like, so there is little excuse for delay.

And we should treat getting there as a formal change programme. That’s not to say that change will stop when it is finished. But faced with the need for investment for CP2030 and beyond, investors (and customers) need clarity and conviction that a well-defined programme of work will be pursued quickly, and will address the challenges we have all been talking about for so long.