Strategic Spatial Energy Plan: setting direction without fixing the outcome

Delivering the future GB electricity system will require major new generation, storage, demand-side, and network investment. The Strategic Spatial Energy Plan (SSEP) can play an important role in giving that investment direction and allowing networks to be built ahead of need. But that raises a central question: how can the SSEP guide investment and network build while still allowing competition and market signals to identify the projects, technologies and locations that minimise overall system costs?

Why competition still matters under the SSEP

There is a strong case for greater central planning. Network investment increasingly needs to take place ahead of generation and demand, and it would be difficult to plan that network efficiently without a view of the likely geographic pattern of future investment.

But the SSEP cannot perfectly predict the future. Technology costs, project availability, demand and wider system conditions will evolve. This creates two reasons to preserve some flexibility around the plan:

• First, there is the question of the precise spatial and technology mix. The SSEP needs to provide a sufficiently clear view of where different types of capacity are likely to be required to support network planning. But the most efficient eventual mix may differ from that plan as circumstances change.

• Second, there is the question of which individual projects should deliver that capacity. The SSEP itself will not select projects. That will continue to be determined through broader allocation and market arrangements, including the connections queue, seabed leasing, CfD and Capacity Market auctions, and other technology-specific support mechanisms. Even if the broad spatial and technology mix in the SSEP ultimately proves right, there remains an important role for competition between the projects capable of delivering it.

Competition provides a way of identifying which projects can actually deliver, at what cost and on what timetable. If the SSEP and connections process effectively close off investment once the planned volume in a location has been reached, the system risks losing that mechanism and becoming overly dependent on the projects and assumptions already embedded in the pipeline.

That has a practical implication for developers. A potentially low-cost project may look at the projects ahead of it in the connections queue and conclude that there is no credible route by which it can compete for a place in the future system, even where earlier projects are more expensive. If developers cannot see a realistic pathway through which better projects can compete with weaker ones, investment in developing those alternatives may simply stop.

This argues for setting Connection Capacity Thresholds (CCTs) with sufficient headroom above the SSEP planning line to preserve a credible route for competing projects and allow some efficient variation in the eventual technology mix and spatial distribution.

How much headroom is appropriate is itself a trade-off. More headroom preserves competition and creates more scope for the market to improve on the plan, but also increases the risk that investment develops in ways that add to constraint costs, network costs, or other system costs. That leads directly to the next question: if projects are given room to deviate from the SSEP, how should the market be encouraged to use that flexibility in the plan outcomes efficiently?

Making headroom work and the role of locational signals

If CCTs are set with headroom above the SSEP planning line, locational signals have an important role to play in determining how that flexibility is used.

The purpose of creating headroom is to preserve competition and allow the eventual pattern of investment to differ from the SSEP where circumstances justify it. Technology costs may change, particularly competitive projects may emerge, or assumptions underpinning the SSEP may prove wrong. Equally, some deviations from the plan may add materially to network or constraint costs.

Locational charges can therefore help investors take those system consequences into account when deciding whether and where to invest by reflecting the incremental network or system impacts of their investment decisions.

This also highlights an important distinction between the broad approaches Ofgem is considering. Some options use charges primarily as a mechanism for bringing investment back towards the SSEP planning line. Others seek to provide an economic locational signal based on the consequences of the investment itself.

There is a tension in the first approach. If headroom has deliberately been created to preserve competition and allow some variation around the SSEP, using locational charges principally to steer investment back to the plan is a relatively complicated way of recreating the outcome that tighter CCTs could have delivered directly. It also risks reducing the value of the flexibility that the headroom was intended to provide.

A more coherent combination would be for SSEP to set the strategic direction, CCTs to define the space within which competition can operate, and locational charges to help the market use that space efficiently. The looser the CCTs, the more important it becomes that the locational signals within that space reflect genuine system costs and benefits.

That in turn raises an important question for developers: how much uncertainty over those signals should they continue to bear after they have committed capital?

When should locational signals be fixed?

Allowing locational charges to vary annually can expose developers to changes in network conditions, modelling assumptions and the behaviour of other market participants long after their original investment decision. That uncertainty can matter for investability, particularly where the developer has limited ability to respond to the later change.

The economic rationale for a siting signal is strongest when an investor can still respond to it. Before an investment decision, the market is still able to choose between different locations, technologies or projects. Once a capital-intensive asset has been built, however, many of those choices have been made.

For many assets, there may then be no further locational decision for an updated investment signal to influence for many years. The next relevant decision may arise only through major refurbishment, repowering, life extension or expansion. Until then, periodically changing the charge may add investor risk without changing behaviour. From a system-efficiency perspective, fixing the signal over that period therefore need not involve a meaningful trade-off.

The position will not be the same for every technology. Some assets may face earlier incremental investment decisions, while others may have meaningful closure or retirement decisions that a locational signal could influence. Peaking plant, for example, may have more discretion over whether to remain open, while storage assets may face expansion or reinvestment decisions relatively quickly.

Where such decisions remain open, there is a genuine trade-off. Fixing the signal improves predictability but may weaken an incentive that could otherwise influence an efficient future decision. Policymakers may still choose to fix the signal, but should do so recognising that trade-off.

The key question is therefore which decisions a locational signal can still influence, and when those decisions arise for different technologies. That provides a more useful basis for deciding how long charges should be fixed rather than applying a single approach to all assets.

A coherent role for planning, competition and locational signals

The overall framework should therefore be to use the SSEP to set direction; preserve enough headroom above the planning line for the spatial and technology mix to adapt and for individual projects to compete; use locational signals to distinguish efficient from inefficient deviations from the plan; and provide stability once those signals can no longer influence a meaningful economic decision.

That would allow strategic planning to guide the development of the system without requiring the SSEP to provide perfect foresight or removing the role of competition in discovering better outcomes.