New ESO report finds electricity market reform critical for delivery of future system that is affordable, secure and clean

• Net Zero Market Reform report shows wholesale electricity market reform is needed to deliver net zero at significantly lower cost to industry and consumers 
• Current market was not designed for net zero, and if left unchanged, will impose excessive costs  
• A nodal, location-based, wholesale market leads the ESO’s range of operational redesign options to unlock opportunities for low-cost, low-carbon electricity to be harnessed when and where it is abundant 

Britain's electricity market needs to be substantially reformed if it is to deliver a net zero electricity system by 2035 at least cost to households and industry, reveals a new report.  

Net Zero Market Reform – Phase 3 Assessment and Conclusions finds that the current market design – based on a blanket national wholesale price for electricity – is no longer fit for purpose for a rapidly decarbonising system.  

The study makes clear that the existing wholesale market design is contributing to a dramatic rise in constraint costs and inefficiencies in balancing the network, while undermining the capability to deliver demand-side flexibility. And if left unchanged, the current national pricing model will impose excessive and unnecessary costs on consumers.  

The favoured reform option outlined in the report from the ESO, which analysed over 1,500 individual stakeholder interactions, is a nodal location-based wholesale market with central dispatch.  

This option could create opportunities for low-cost, low-carbon electricity to be harnessed when and where it is abundant, contributing to lower household electricity prices and reduced network operating costs, while helping to decarbonise the system. 

It could also facilitate the efficient management of the system and help to incentivise flexible assets to locate and operate in the optimal way for the electricity system. 

‘Nodal pricing’ divides the national network into different nodes, each with their own wholesale electricity price which reflects the cost of supplying electricity at that location. 

When coordinated by a system known as ‘central dispatch’ it could also help unlock efficiency savings and provide an easier route to market for small, flexible assets.  

The scale of these benefits is currently being assessed by Ofgem, with the ESO’s report feeding into that process.  Moving to a locational pricing system would require legislative and regulatory changes and any final decisions on fundamental reform will be made by the Government.  

The next phase of analysis by the ESO will assess the implementation and implications of nodal pricing and central dispatch, as well as assessment of other market design elements to complement these proposed reforms to the wholesale market. 

Cian McLeavey-Reville, Senior Manager, Markets Development, ESO said: 

This landmark study, which captures a wealth of ESO and industry insight, sets out how we can design flexible and efficient electricity markets that can deliver net zero at the lowest cost to the consumer. 

The options presented today lay the groundwork for a future energy system which is secure, reliable and offers value for money. We must transform our markets, not only to encourage renewables onto our energy system but also to ensure that clean energy can be delivered when and where it is needed for maximum consumer benefit.  

Markets are one piece of a broader picture and cannot be looked at in isolation from holistic network design and capacity adequacy – they must be structured to incentivise dispatch and investment decisions critical for clean energy and consumer value. Electricity market reform is an ambitious, complex endeavour and working together with our newly-formed Markets Advisory Council, industry, government and regulatory partners, we can make it happen.

Read the full Net Zero Market Reform assessment and options study here.