Exploring Market Change in the GB Electricity System: the Potential Impact of Locational Marginal Pricing

There is growing awareness of the importance of electricity market frameworks in supporting the delivery of key Government ambitions in Britain including delivery of net zero across the economy. The ongoing UK Government Review of Electricity Market Arrangements (REMA) explores a wide variety of options including the concept of Locational Marginal Pricing (LMP). This option has gained significant attention in the sector, with advocates arguing that it will provide incentives to provision of ‘flexibility’ on the power system and reduce the impact of network constraints on the cost of energy.

This independent review by researchers at the University of Strathclyde explores LMP, how it might be applied in Britain and how the costs and risks faced by different market participants might change were it to be introduced. It describes some key features of existing LMP markets and, through review of existing literature and a series semi-structured interviews with industry experts, identifies key challenges for implementation in GB.

The work concludes that whilst there may be some theoretical benefits to LMP, there are likely to be huge challenges in delivering an LMP market that is well adapted to the GB system. Massive investment in low carbon sources of generation and flexibility is required in the coming years. The work cautions that, unless it is part of a well designed package of reforms and there is investment in sufficient network capacity, the introduction of LMP has the potential to put the UK Government’s commitment to decarbonise the electricity system by 2035 at significant risk.

This report is supplemented by 'Exploring Market Change in the GB Electricity System : the Potential Impact of Locational Marginal Pricing - Stakeholder Insight Report', available: https://doi.org/10.17868/strath.00083868