It’s all about location - Will changing the way we price electricity deliver for consumers?

It’s all about location - Will changing the way we price electricity deliver for consumers? 1.66 MB

As the statutory advocate for consumers in the energy sector, Citizens Advice is considering how reforms to electricity markets can help to deliver an affordable and sustainable energy system that works for consumers. In February, we published the first in a series of discussion papers examining these reforms in detail. It examined the potential drawbacks of moving to a split-market model, and set out possible alternative pathways to ensure electricity prices become more stable and affordable.

Another major reform being considered is called locational pricing. This concerns whether to move to a system where the wholesale price of electricity varies between locations. Under today’s arrangements, there is a single wholesale market that covers the whole of Great Britain (GB), and participants (generators, storage providers, suppliers and large consumers) face the same wholesale price signal wherever they are. Some are worried that under this model, the future energy system could end up being built and operated in a way that actually drives up the cost of energy for consumers.

But moving to locational pricing could have a number of unintended consequences if it affects the willingness of developers to invest in new infrastructure. There is also an open question about the extent to which consumers could be exposed to any new price variations. Concerns have been raised about the implications this could have in terms of producing unfair outcomes for households.

This discussion paper outlines some of our emerging views on the case for implementing locational pricing, and the risks that would need to be addressed if it is implemented. We have also sought to set out alternative recommendations if it is decided that locational pricing fails to deliver sufficient value. It is deliberately provocative in places and we welcome feedback on the findings via the following email address: euan.graham@citizensadvice.org.uk. Setting out these concerns will enable them to be better addressed as proposals are developed. We find that:

A range of options exist for shielding consumers from locational price signals, so this is not a reason to avoid locational pricing. There will likely be a need to address the distributional impacts of locational pricing.

Whether or not risks to timely investment in generation can be addressed will determine whether it is worthwhile to consumers to implement locational pricing. 

Problems with how the grid is operated are too big to ignore - and other options to manage constraints are underdeveloped. Detailed proposals are needed in future consultations so they can be better scrutinised.

The impact on the retail market needs more scrutiny. Retail reform must specifically consider what provisions should be made if locational pricing were implemented.

This debate should not distract from urgent programs of reform that are already underway. Network buildout, planning reform and the smart meter rollout will all be vital to deliver a flexible and low cost power system.