Authors: Simon Gill, Keith Bell and Callum MacIver
Extended Blog post: Available on the UKERC website
Report document, including executive summary, full report and stakeholder engagement summary available via the University of Srtathclyde.
Along with Keith Bell and Callum MacIver I’ve spent much of the past six months trying to understand the workings of
LMP. We’ve been looking at how it works in existing markets and exploring what might happen if we implement it here in GB.
One of my main take aways is this: the theory is only one part of the story. Yet much of the debate and the modelling informing the GB discussion on market design is based only on relatively high level theory. We have to make our markets work in practice and the details are important; we don’t need theoretical perfection, we need something that is based in pragmatism and works in practice.
Today we’ve published the result of our work: a detailed exploration of LMP along with 15 conclusions and 6 recommendations. Here are a couple of the conclusions:
>Moving to LMP could increase the risk of failing to deliver decarbonised power by 2035.
>LMP could significantly increase the cost of
capital for generators, but that depends on the interaction between the wholesale energy market framework and the wider package of market reform including mechanisms to support investment in new low carbon generation.
>LMP markets are in use in some parts of the world; some of them have a reasonable level of ZMC renewable (wind and solar) penetration but not (nearly) to the extent that GB expects to have by 2035.
The work doesn’t aim to give a yes / no recommendation on LMP. But it does highlight a number of what we think are significant gaps in the debate, particularly around risk, uncertainty and a general vagueness about how LMP works. Hopefully it provides an exploration of some of the details that we need to get to grips with in order to make an informed decision.
The content in the report comes from three activities:
1. A serries of semi-structured interviews with experts in GB and from electricity markets which currently use locational pricing.
2. Reading *a lot* of documents covering both the theory and practicality of LMP.
3. Working through the implications of trying to implement LMP in the GB context. A context that includes:
>an ambition to fully decarbonise our electricity system by 2035 (subject to security of supply);
> a system which needs to move to a generation mix of the order of 80% zero marginal cost wind / solar generation in order to
achieve that decarbonisation;
> major transmission constraints today and for the foreseeable future; and
>a system where the interaction between an LMP market and other aspects of the system, particularly the CfD support mechanism, will be very different from any existing LMP system.