𝐒𝐦𝐨𝐤𝐞 𝐬𝐢𝐠𝐧𝐚𝐥𝐬 𝐨𝐫 𝐥𝐚𝐬𝐞𝐫 𝐠𝐮𝐢𝐝𝐚𝐧𝐜𝐞, 𝐟𝐢𝐧𝐝𝐢𝐧𝐠 𝐭𝐡𝐞 𝐫𝐢𝐠𝐡𝐭 𝐩𝐫𝐢𝐜𝐞 𝐬𝐢𝐠𝐧𝐚𝐥𝐬 𝐟𝐨𝐫 𝐧𝐞𝐭 𝐳𝐞𝐫𝐨…

As the GB electricity market heads towards net zero, the market shift towards being able to deliver it are beginning to take hold.

With the GB market being the first major economy to coal free, we rely more and more on smaller distributed generation and customer side flexibility.

However, how these assets receive market price signals to optimise output and consumption remains contentious. Very volatile and complex prices may create ‘perfect’ signals; but they also create a lot of ‘noise’ to be managed.

𝐈𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬 𝐰𝐚𝐧𝐭 𝐜𝐞𝐫𝐭𝐚𝐢𝐧𝐭𝐲, 𝐚𝐧𝐝 𝐜𝐨𝐦𝐩𝐞𝐭𝐢𝐭𝐢𝐯𝐞 𝐫𝐞𝐭𝐮𝐫𝐧𝐬.

Investment capital is internationally mobile, so the market needs to compete. The government CfD subsidy schemes continue to offer price certainty for investment time horizons, providing price security irrespective of market price outcomes.

𝐂𝐨𝐧𝐬𝐮𝐦𝐞𝐫𝐬 𝐰𝐚𝐧𝐭 𝐜𝐞𝐫𝐭𝐚𝐢𝐧𝐭𝐲, 𝐚𝐧𝐝 𝐜𝐨𝐦𝐩𝐞𝐭𝐢𝐭𝐢𝐯𝐞 𝐩𝐫𝐢𝐜𝐞𝐬.

While a relatively small number of domestic customers are currently using short term prices to drive their behaviour; the majority of domestic and businesses users continue to favour price certainty.

𝒀𝒆𝒕 𝒑𝒐𝒍𝒊𝒕𝒊𝒄𝒊𝒂𝒏𝒔, 𝒓𝒆𝒈𝒖𝒍𝒂𝒕𝒐𝒓𝒔 𝒂𝒏𝒅 𝒔𝒐𝒎𝒆 𝒎𝒂𝒓𝒌𝒆𝒕 𝒑𝒂𝒓𝒕𝒊𝒄𝒊𝒑𝒂𝒏𝒕𝒔 𝒘𝒂𝒏𝒕 𝒑𝒓𝒊𝒄𝒆𝒔 𝒕𝒐 𝒃𝒆 𝒍𝒆𝒔𝒔 𝒔𝒕𝒂𝒃𝒍𝒆.

The competing forces of:

We need very sharp price signals to provide a signal to do something;

 verses

we need long term certainty for investment/ budgeting

𝐖𝐡𝐲 𝐢𝐬 𝐢𝐭 𝐬𝐨 𝐝𝐢𝐟𝐟𝐢𝐜𝐮𝐥𝐭 𝐭𝐨 𝐫𝐞𝐬𝐨𝐥𝐯𝐞?

Some economic models suggest very targeted price signals – including locational commodity pricing - will yield overall lower costs through telling supply and demand how to behave in specific areas at specific times.

Practicality suggests that the implementation of this will be complicated, may lead to  delayed investment, may increase the cost of investment due to higher risks, and may reduce wholesale market liquidity further. These could increase costs, removing the modelled benefit

The reality is that the changing generation asset mix, and more flexible consumption behaviour needed to reach net zero need some kind of control – but does it have to be complex price signals?

𝐒𝐦𝐨𝐤𝐞 𝐬𝐢𝐠𝐧𝐚𝐥𝐬 𝐕’𝐬 𝐥𝐚𝐬𝐞𝐫 𝐠𝐮𝐢𝐝𝐚𝐧𝐜𝐞?

The laser guidance for full locational pricing and a fundamental shift towards this require significant investment in technology to automate and respond to signals.

However, one of the so far unquestioned elements is how much this has to be real-time price led. 

An unspoken element of local markets is that they will need central dispatch to operate effectively. This will be different than the old central dispatch of large power-station days, but there will still need to be a central point of control, a fundamental market shift compared to today.

𝑫𝒐𝒆𝒔 𝒕𝒉𝒂𝒕 𝒏𝒆𝒆𝒅 𝒕𝒐 𝒃𝒆 𝒓𝒆𝒂𝒍-𝒕𝒊𝒎𝒆 𝒑𝒓𝒊𝒄𝒆 𝒔𝒊𝒈𝒏𝒂𝒍𝒔, 𝒐𝒓 𝒄𝒐𝒖𝒍𝒅 𝒊𝒕 𝒃𝒆 𝒔𝒊𝒎𝒑𝒍𝒚 𝒎𝒂𝒌𝒊𝒏𝒈 𝒕𝒉𝒆 𝒃𝒆𝒔𝒕 𝒅𝒆𝒄𝒊𝒔𝒊𝒐𝒏 𝒃𝒂𝒔𝒆𝒅 𝒐𝒏 𝒕𝒉𝒆 𝒑𝒉𝒚𝒔𝒊𝒄𝒂𝒍 𝒐𝒑𝒕𝒊𝒐𝒏𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆?

Flexible assets could be paid a fixed fee for being available – and option fee.

This would create more of a smoke signal than a lase guide to individual assets, but could create certainty of income and cost. Through having a fixed income, but then relinquishing real time control financial certainty is provided while retaining optionality in how the problem is solved without huge market complexity.

With all electricity market problems, there is always more than one solution.

Being on top of the changes and understanding how they may impact your business will pay dividends in the long run.