Reforming the UK electricity market so wholesale prices reflect local supply and demand could foster large-scale investment in renewable energy generation and speed up the country’s net-zero transition, finds a new study from the non-profit Energy Systems Catapult. 

Analysing markets across the US and in New Zealand where locational marginal pricing (LMP) is commonplace, and European markets that use zonal pricing mechanisms, the report found that markets with LMP typically adopt complementary policies that support investment in renewables – such as clean energy standards on suppliers and tax credits for renewables investment.

Power lines at sunset near Pontefract in West Yorkshire, England. (Photo by Chris McLoughlin via Getty Images)

The combination of LMP and these “demand pull” policies encourage high levels of investment in renewables, found the report. For instance, since introducing LMP in 2009, California has added 3.5GW of wind capacity and 14GW of solar PV to its network – taking their cumulative share of generation capacity in the state to 25%. The sharper price signals in LMP markets did not appear to increase the cost of capital for generators, as some experts have warned. 

LMP is also linked to the provision of storage, with storage disproportionately located in LMP markets operated by independent system operators and regional transmission organisations in the US. Although they make up just 58% of grid capacity in the US, LMP markets account for 74% of large-scale battery storage power capacity (GW) and 72% of energy capacity (GWh). Variable renewables behaved more like price-responsive assets in LMP markets by contracting with or co-locating with storage, found the study.

“The perceived conflict between market designs that support investments in renewable generation and those that support investments in flexibility can be overcome; they do not need to be mutually exclusive,” said Ben Shafran, head of markets, policy and regulation at Energy Systems Catapult, in a statement. “Britain does not need to choose between a market that works for investors in renewables and a market that works for investors in flexibility – both can be successfully accommodated by learning from international experience.”

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