A substantial programme of reform to the Great Britain (GB) electricity market is being considered as part of the government’s Review of Electricity Market Arrangements (REMA).

A key decision relates to whether to introduce a zonal wholesale market, or whether alternative incremental reforms to the current arrangements should be relied upon instead. Frontier Economics has published a report identifying and assessing potential incremental reforms in GB. 

Studies from DESNZ and Ofgem have shown potentially substantial benefits from zonal pricing, the majority of which relate to more efficient dispatch. However, both DESNZ and Ofgem have signalled a need to understand better the extent to which these potential efficiency benefits could also be achieved through incremental reform to the current national market.  

Scottish Power commissioned Frontier Economics to identify inefficiencies in the current balancing arrangements in GB, identify reforms to address them and consider the extent to which these reforms could mirror the more efficient dispatch assumed to be feasible under locational pricing. 

We identify a range of different potential inefficiencies that could be considered as part of reform to the current national market.  However, a key area of focus in our report is the interconnector redispatch arrangements.  Much of the operational benefits claimed for a zonal market rest on the idea that absent locational wholesale price signals interconnectors would exacerbate constraints and cannot be redispatched, resulting in costly alternative balancing actions to be taken by ESO. 

In our report: 

• we explain how currently ESO is able to make adjustments to interconnector flows relative to the commercial position set by traders in the wholesale market when the cost of doing so is less than its expected costs of alternative redispatch actions onshore; 
• we observe, based on analysis by LCP Delta, that such actions are frequent, undertaken by ESO on most days of the year, which is inconsistent with an assumption that interconnectors cannot be redispatched in a national market; but   
• we note that despite this frequency, there may be potential for ESO to make further efficient adjustments to interconnector flows, and these opportunities may also increase in future as future interconnectors connect. 

As a result of this assessment, we identify a number of potential inefficiencies related to the current arrangements, and make suggestions for possible improvements.  These include developing more consistent arrangements for ESO trading across all current and future arrangements, and developing more dynamic arrangements for sharing balancing bids and offers between ESO and its neighbouring system operators, similar to those that were being developed by the Channel TSOs prior to Brexit.  

Beyond interconnectors, we also identified a number of balancing inefficiencies and suggested possible solutions related to: 

• The information that ESO receives from market participants for the purposes of balancing in the Balancing Mechanism (BM).  We discuss the potential for changes to the bidding arrangements in the BM in order to provide greater flexibility to ESO when making its dispatch decisions, noting that ESO has recently taken a step forward in this regard with the launch of its new Balancing Reserve.  We also consider ways to provide ESO with firmer information earlier regarding the physical state of plants (including storage) in order to help it manage the expected increase in locational redispatch actions, including bringing forward gate closure. 
• The optimisation process being used by ESO to determine efficient balancing actions.  For example, we discuss the benefits of ESO considering the optimisation of storage assets over multiple periods in order to identify the most efficient period in which its limited energy should be used.  This may become an increasingly material issue as storage becomes a critical technology for balancing low marginal cost technologies.  We also consider the benefits of ESO implementing a system wide nodal algorithm in order to identify the most efficient redispatch actions. 

For each of the options we identify in the report, we discuss the potential efficiency benefits they might bring, as well the challenges for implementation.  While there are challenges, we note that many of the issues raised in the reforms we identify would need to be addressed as part of a move to locational pricing.  For example, improving the way storage is optimised will be just as important for the development of a locational market (indeed more efficient dispatch of storage is often claimed as a key benefit of the potential change). Similarly, an identical optimisation algorithm could be used by ESO in both a national and a locational market.   

The key area in which this may not be the case relates to interconnectors, where the necessary arrangements are more unique to a national market, and therefore the efficiency of dispatch will depend on the effectiveness of those intraday redispatch and SO-SO arrangements.  In turn, this may depend on constraints imposed by the need to secure agreement with interconnected system operators. 

Click here to read the summary ANALYSIS OF REFORM
OPTIONS FOR STATUS QUO ELECTRICITY BALANCING
ARRANGEMENTS

Click here to read the full report ANALYSIS OF REFORM
OPTIONS FOR STATUS QUO ELECTRICITY BALANCING
ARRANGEMENTS