University of Edinburgh academics Dr Ronan Bolton, Prof Chris Dent and Dr Lars Schewe recently led on the establishment of the Scottish Forum on Future Electricity Markets. Working in collaboration with the Royal Society of Edinburgh and ClimateXChange, the initiative seeks to inform Scottish Government policy and wider public discourse on the crucial topic of electricity market reform.

The first meeting of the forum was held in December 2024. This brought together experts from academia, policymakers and a range of stakeholders to discuss the design of the electricity market and its role in enabling a least cost and equitable transition to a net zero power sector in Scotland. 

Participants discussed locational pricing in wholesale electricity markets. A proposal to split the integrated GB market into separate pricing zones has been put forward by the UK Government as part of its Review of Electricity Market Arrangements (REMA). The measure is designed to improve the operational efficiency of the electricity system and to reduce the costs to consumers of curtailing renewables.

A fundamental change to the current market design and the introduction of locational pricing would likely have large impact on Scottish consumers and investors. The forum discussed key opportunities and challenges of electricity market reform for Scotland, drawing on the best available evidence and international expertise.

There were over 40 participants from across a range of stakeholder groups, including consumer bodies, the energy industry, the Scottish and UK Governments, the National Energy System Operator (NESO) and representatives from Highlands and Islands communities.

Click here to access the full report by Ronan Bolton, Chris Dent and Lars Schewe. 

For further information please contact Dr Ronan Bolton ronan.bolton@ed.ac.uk

Executive summary

The main topic addressed at the ‘Scottish forum on future electricity markets’ in December 2024 was locational pricing in wholesale electricity markets. This is a particularly complex and contentious area that forms a key part of the UK Government’s ongoing Review of Electricity Market Arrangements (REMA) programme.

Locational pricing would involve separation of the GB power market into multiple pricing zones, which are defined around the most significant constraints on the transmission grid. This would contrast with the current national pricing model where the revenues electricity generators earn from selling into the wholesale power market do not reflect their impact on the transmission system.

The argument for locational pricing is that it would reduce constraints on the network and therefore also reduce payments to generators to adjust their output due to network congestion, thus benefiting consumers. Incorporating scarce transmission network capacity into the wholesale electricity price would also improve overall system efficiency as market participants would be incentivised to locate assets and operate them more in line with the physical realities of the power system.

A fundamental change to the current market design and the introduction of locational pricing would likely have a significant impact on Scottish consumers and investors. The high level of renewables located in Scotland relative to its electricity demand means that locational pricing could see Scottish consumers benefit from significantly lower bills. This could help accelerate the electrification of heating and transport. Meanwhile, the availability of cheap, reliable and clean power could attract substantial inward investment by energy intensive industries and data centre operators.

However, fundamental market reform brings risks. If these cannot be managed by investors, the cost of financing large scale wind projects will increase, putting in jeopardy a key pillar of Scotland’s energy and economic strategy. On this basis, some argue instead for a ‘reformed national market’, which would involve NESO – the National Energy System Operator – making substantial improvements to its current approach to balancing and redispatch.

Scottish and UK Government representatives opened the forum by setting out policy priorities and the latest developments in the REMA programme. Participants then heard from Scottish and invited international experts who outlined the operation of locational pricing in European and US markets. The forum discussed what lessons have been learned, what relevance these market designs may have for the specific Scotland/GB context and the challenges faced in meeting net zero.

In the final part of the day participants were divided into thematic discussion groups, which addressed different questions and challenges relating to the implementation of electricity market reforms from a Scottish perspective. During the discussions, participants identified several key questions and issues pertaining to the Scottish Government’s net zero, just transition and economic strategy, which need to be addressed:

• Aligning market reform and the clean power mission: Stakeholders expressed concern that the multiple and highly complex reform processes ongoing at the UK level may not be complementary and could conflict with one another, thus exacerbating investment risk and putting Scotland’s net zero target in jeopardy.
• Impacts on the cost of capital: The modelled socio-economic benefits of locational pricing are highly sensitive to changes in the cost of capital. The evidence base on the extent to which locational pricing could increase the cost of financing large renewables projects in Scotland and for how long this premium may endure is not sufficient.
• The relationship between locational pricing and industrial policy: There are conflicting claims in the debate about the extent to which lower wholesale electricity prices influence investment decisions in electricity intensive industry. For some, this could be a key advantage of locational pricing, whereas others argue that power prices are only one, relatively minor, factor in industrial siting decisions. The economic impacts of different electricity pricing scenarios should be analysed and modelled to inform the Scottish Government’s industrial and foreign direct investment policy.
• Delivering large transmission projects: The benefits of locational pricing diminish as more capacity is added to the transmission system, in a way which alleviates constraints. More work could be done examining recent experiences of delivering large transmission projects on time and budget, exploring key challenges such as supply chain coordination, public acceptability and optimism bias.
• Updating the counterfactual: The next phase of REMA and the decision about a zonal or reformed national market will require an updated counterfactual to locational pricing. There is a need to investigate how a package of reforms to the current market, including transmission network charging reforms and better management of interconnector flows, can be delivered and implemented.
• Understanding zonal markets: Zonal markets have been in operation across the EU/EEA, in the US and Australia for more than three decades. More and better evidence could be gathered on these international experiences, particularly recent cases of creating zonal markets and the legacy/transitional arrangements introduced.
• Open access and transparent modelling: Much of the electricity market modelling expertise is within economic consultancies, only accessible by governments and large energy companies. The need for open access and more transparent modelling tools was cited in the discussions, along with the need to build electricity market modelling capabilities within Scotland.
• Socio-economic welfare impacts: Socio-economic welfare impacts of different market design options need to be studied from a Scottish perspective, requiring a detailed analysis of impacts on consumer groups and regions.
• Ongoing dialogue: Finally, REMA should not be seen as a one-off reform. Regardless of the preferred option – zonal pricing or a reformed national market – there will need to be an ongoing dialogue between the Scottish Government, the UK Government and the wider stakeholder community regarding implementation and future reforms as the electricity system evolves over the coming decades.