Radical change to electricity market risks delay to major new wind investment in Scotland, says new report

Andrew Bruce (SFT)

EVOLUTION rather than revolution in electricity market arrangements is needed if the UK is to meet its net zero targets, according to a report for infrastructure specialists the Scottish Futures Trust (SFT).

Any move to locational marginal pricingput forward as one of the main options for reform by UK Government and favoured by some important electricity sector stakeholders, risks a long period of hiatus in significant new renewable electricity generation, at a time when a huge increase is required compared to the past ten years. 

The report, entitled ‘A Review of Electricity Market Arrangements – a Vision for Scotland’ was prepared for SFT by independent energy consultants The Energy Landscape.

The report highlights that whilst some changes to electricity market structures are needed to cope with a system dominated by intermittent renewable generation, this could be achieved through reform of the existing market mechanisms.

The report also states that if investor confidence is not retained, consumers will continue to be exposed to volatile gas prices and fewer jobs will be created in new generation and emerging new sectors such as hydrogen. 

The report considers a range of stakeholder views, from consumer groups to generators and the public sector, provides technical analysis and makes the following proposals for the future of the electricity market:

  1. A shared vision and plan should be agreed for Great Britain’s electricity system with a clear, strategic role for Scotland within it.
  2. A substantial acceleration of investment in network infrastructure should be delivered to support this plan.
  3. Clearer communication of how consumers benefit from the renewable transition, today and in the future, should be prioritised.
  4. Retain a Great Britain-wide wholesale market with a single national price, that supports Scotland’s ambition of becoming the engine room of the UK’s renewable energy generation.
  5. Investment signals should be improved to encourage new industry (e.g. data centres and green hydrogen producers,) to locate in Scotland.
  6. Improve the way Great Britain’s electricity system is operated, ensuring Scottish consumers benefit from the availability of low-cost renewable generation.

These proposals aim to boost investor confidence and drive capital spending in new onshore wind investment and Scotwind to help deliver lower, stable prices for consumers and accelerate the move to UK net zero targets. The report also highlights the significant risks that a move to locational-based electricity pricing would create for Scotland’s and GB’s decarbonisation ambitions.

Andrew Bruce, Senior Associate Director at the Scottish Futures Trust who leads on this work, said: “This report emphasises that a radical move to locational marginal pricing, at a time of substantial transmission constraints and doubts about the speed of future grid delivery, threatens to choke off or delay the substantial investment required in new on and offshore wind farms. The report sets out a clear vision for an alternative system that is compatible with increased investment, reduced curtailment of available power and a just transition to net zero. 

“Scotland has a key role to play in delivering the UK’s 2035 target of a fully decarbonised power sector. We have a current renewable energy capacity of 15 GW which needs to increase more than three-fold to at least 50 GW within the next 12 years if the UK Government is to meet its net zero commitments.  Scotwind has a critical role to play in this.

“Creating and maintaining a secure and stable investor market will be critical to bringing in the tens of billions of investment required for this transition. We need to attract investors in renewables, batteries and the green hydrogen sector. If we can achieve that, Scotland could potentially generate  green electricity to cover the electricity demand of everything north of Nottingham by 2035.”

2020 marked the first year in the UK’s history where electricity came predominantly from renewable energy, with 43% of the country’s power coming from a mix of wind, solar, bioenergy and hydro-electric sources.

However, meeting the UK government’s commitment to delivering a fully decarbonised power sector by 2035 will require a rapid scale-up of low carbon technologies. The increasing volume of variable renewables, such as wind and solar power, will pose greater challenges for managing the electricity system, and supporting investment in batteries, pumped storage and green hydrogen will be critical to overcoming these challenges.

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