The case for LMP in the UK, including recent evidence from existing studies

Sofia Birattari

NERA Economic Consulting, UK

This paper reviews the case for the introduction of Locational Marginal Pricing (LMP) in Great Britain. We draw on evidence from our project completed for National Grid ESO, where we assessed challenges related to incentives to investment, decarbonisation, and wholesale market liquidity in the British context. We also review previous evidence on cost benefits and implementation issues from jurisdictions with LMP (such as US markets and New Zealand) and from the long-term modelling study we performed to advise the Australian Energy Markets Commission (AEMC) in the context of a large set of wholesale market reforms, including the introduction of LMP and Financial Transmission Rights (FTRs) as a hedging instrument.  The core of our approach was to develop a long-term power system model in PLEXOS of a nodal Australian electricity market both with and without the reforms.  The modelling identified future locational electricity prices and dispatch decisions, as well as endogenous future generation and transmission investment in the two scenarios.  We then used the modelling results to identify key reform benefits such as more efficient despatch and investment decisions.  Our analysis suggested overall benefits of reform to society and consumers of AUSD 6.3 billion (~£3.4 billion) by 2040 in NPV terms, of which AUSD 1.7 billion were associated with capital and fuel cost savings from more efficient locational decisions for new technology.