Case Study: how locational pricing could save businesses (and everyone) on bills

Government are considering much-needed reforms to the electricity market in GB, in part to pass on the benefit of cheap-to-produce renewables to customers. One price system they're considering is locational pricing (where prices vary across the country based on available network capacity and local generation.)

Ofgem's analysis so far has found that locational pricing could benefit all consumers (including industry), saving £28 to 51 billion across the period from 2025 to 2040.

Their work focused on the impact of locational pricing on the location choices of large generators. We wanted to look at the location choices of energy users.

In this analysis, we've worked with FTI to build on Ofgem's work and look at how large, industrial energy users could save money by locating their operations to make the most of locational prices.

Our findings

We looked at case studies of two large (2 terawatt hour) industrial plants – one with fixed energy load, one flexible – to see what would happen if they each sited their operation in Scotland instead of the South to make the most of locational pricing.

Here's what we found.

  • The businesses' savings would be significant - up to a 65% reduction in wholesale energy costs if they used energy exactly as normal, and over 99% reduction if they 'flexed' their energy use to the cheapest, greenest times across the day.
  • It'd cut bills for all GB consumers by making the most of green energy that would've gone to waste: unlocking £500-900 million in bill savings for everyone between 2030-2040
  • We'd make much better use of homegrown renewables. Avoiding switching off as much as 17 TWh of extra wind power over ten years – enough power for 460,000 households each year

Britain is world renowned for having led the way in decarbonising its electricity supply, with abundant green electrons now powering homes and businesses up and down the land. However, the industrial electricity price (including taxes and levies) is the 3rd highest out of IEA countries, significantly hampering the UK’s global competitiveness.

As the government considers much needed reforms to the GB electricity market, it has a once in a lifetime opportunity to fix this drag on our economy by introducing locational pricing.

Simply put, locational pricing means that we would move away from a single GB wholesale price for electricity and instead introduce local pricing that reflects what it costs to produce and supply electricity in any given place around the country.

Doing this could save consumers up to £53bn between 2025-2040, reducing prices for every single person and business in Britain. And businesses located near plentiful levels of renewable energy - e.g. in Scotland or the North of England - would see a dramatic drop in average prices.

This would:

  1. Allow these users to benefit from the lowest energy prices in Europe
  2. Help save all consumers money on their electricity bills - e.g. by reducing the need to build new transmission lines to carry extra electricity from North to South or by removing the need to pay developers to switch off renewables when there is an excess of supply; and
  3. Reduce the UK’s carbon emissions by using up spare domestic renewables supply whilst removing the need for extra gas in the south of the country, or imports from Europe.

The modelling approach

We have developed two case studies to look at these potential benefits which have not been included in the benefits of locational pricing before. The case studies are:

a) locating a large new data centre, with fixed demand, in Aberdeen rather than Slough, close to sites of concentrated demand, and

b) locating a large new electrolyser for hydrogen production, with flexible demand (consuming during the cheapest 50% of hours), in Peterhead in Scotland - rather than on the Isle of Grain in Kent, but at key sites of potential future hydrogen networks.

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The results

Deciding to locate in Scotland would save the data centre 65% and the electrolyser a whopping 99% on their wholesale electricity costs, whilst saving all GB consumers £0.5 and £0.9bn respectively over 10 years. Furthermore, it means much more of the renewable energy being produced in Scotland can be used, rather than being turned off because of congestion on the transmission network - equivalent to the energy needed to power 460,000 households per year (assuming an average yearly household consumption of 3.73MWh).

In addition, the more demand that is located in areas of excess supply, the lower the amount of transmission capacity that’s needed across GB - saving the country money and allowing scarce financial capital to be used to upgrade other parts of the system. For example, the consequence of siting just these two investments in the north rather than the south of the country would be to reduce the ‘needs case’ for electricity network upgrades by 5%. Therefore, we can expect that the more demand that is incentivised to move North, the less grid infrastructure that’s needed, and the lower the total costs for all GB consumers.

This provides yet another reason why the UK should seriously consider a move to locational pricing.

See below the key study results summarised, which show that significant benefits could be achieved when large demand sites in the North under nodal pricing, relative to siting in the South.

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Executive Summary - Impact of electricity market design on siting decisions of large demand


Published on 25th October 2023 by:

image of Rachel Fletcher

Rachel Fletcher

Group Director of Policy and Regulation

Hey I'm Constantine, welcome to Octopus Energy!