Britain’s most productive onshore wind farm, Viking, just became operational. Located in the windiest part of the UK, Shetland, Viking’s 103 turbines have a combined capacity of 443MW - enough to power 500,000 homes.
This is, for the most part, a good news story about more clean domestic energy coming onto our grid. It highlights the remarkable progress in wind turbine technology. A 103 turbine farm ten years ago would not only have produced just 200MW and it would have a much lower capacity factor than Viking’s 48%. Wind power is becoming more reliable.
But, it is also a story that highlights the need to reform our energy markets. When Viking is operating at full capacity, most of its power won’t be used by Shetland’s 20,000 or so inhabitants. Rather, Viking’s power will be going 110 miles south via a subsea cable to the Scottish mainland.
But, there’s a problem. Although on paper, Britain has a single national energy market with a single national price (caveat: there are blunt charges known as Transmission Network Use of System Charges (TNUoS), which are designed to reflect transmission costs), a joule produced in Shetland is unlikely to travel all of the way down to the South East where the demand for power is strongest. In fact, due to a failure of OfGem to enable anticipatory investment in new pylons and cables, a fair amount of that power will be wasted altogether.
Electricity is a weird kind of market. Big problems occur when supply and demand get out of kilter. So if a wind farm in Shetland produces more power than can be transported to households and businesses who need it, then they need to be paid to stop. In fact, despite only becoming fully operational this week, Viking has already been paid £2m to produce less power. That’s more, by the way, than Viking will pay the people of Shetland each year as a community benefit. In fact, despite having Britain’s most powerful onshore wind farm, energy bills in Shetland remain the highest in the UK. In part, this is because they pay more for the transmission network, but also because they use more power than the rest of the country due to cold conditions.
The £2m payment to Viking is nothing special. In fact, what are known as curtailment payments are an increasingly common part of our energy system as we integrate intermittent renewables onto our grid. All of this last minute intervention into the market isn’t cheap either. In 2023, the National Grid’s Energy Systems Operator (ESO hereafter), and ultimately billpayers, spent almost £1bn paying wind farms to switch off because there was nowhere for the power to go.
The parts of Britain with the strongest and most consistent wind speeds are far from the parts of Britain that use the most energy – i.e. the South East. In a world where there were no constraints on transmission (e.g. one where we’ve built more pylons than we know what to do with), this wouldn’t be an issue. But, we don’t live in that world. At the moment, our grid is heavily congested. There’s simply no space on the transmission network for every joule produced in Scotland to make it down South. It is clear that, as a country, we need to invest more in our transmission network and overrule the hypocritical NIMBYs who claim to support renewable energy only to oppose the very wires needed to bring it to people’s homes.
Yet, even without new transmission infrastructure it is possible to cut bills and ensure fewer renewable watts are wasted. Here are three key reasons why Britain should ditch its single national price for energy and instead copy Texas, California, and Canada by moving to a system of local prices which reflect real grid constraints.
1. Turning NIMBYs into YIMBYs: Locational pricing would mean that instead of having some of the most expensive energy bills in the country, the people of Shetland could instead have some of the cheapest. There are high levels of public support for Onshore Wind in Britain, but for every letter in support of Viking’s 103 turbines there were two letters opposed. One local councillor explained to the BBC: “People look out their windows now, they see all these turbines that are generating lots and lots of energy, but they're not seeing the benefit here.” At the moment, when winds are strong in Scotland and there’s not enough capacity to take all that power South, Viking may after selling power at the high national price, end up getting paid even more money to switch off. Under locational pricing, wholesale prices in Scotland as a whole and Shetland in particular will fall while billpayers in the rest of the country don’t end up paying for Viking to switch off.
Locals won’t just benefit from cheaper bills either. Cheaper local energy has another benefit. It also creates an incentive for energy-intensive manufacturers to locate nearby. In other words, locals don’t just get cheaper bills, they also get new jobs to pay for them too.
2. Building infrastructure where it's most useful. When power is dirt-cheap in Shetland and elsewhere, it creates another incentive. Battery companies can buy power when supply far outstrips local demand then sell it back later when local demand is higher or when grid congestion is low. At the moment, there’s little incentive to build batteries where they are most useful. Under a locational system this changes. This isn’t theoretical by the way. Take the example of Texas. Back in 2019, it had almost no battery storage online. There’s more than 120 online now and they’re disproportionately based in the West of Texas. The West, it just so happens, is where it’s windiest and where most of Texas’s wind farms are.
Flexibility doesn’t have to be provided solely through batteries either. Heat pumps, EVs, and time of use tariffs can all help us deal with short-term intermittency and ensure we get as much use out of every renewable electron we produce as possible. Consumers in Scotland would have a massive incentive to switch to innovative tariffs like Octopus Energy’s Agile tariff, which charges lower and sometimes negative bills when power is abundant and higher bills when it isn’t. Such tariffs create an incentive not just to shift when we put the dishwasher on, but also to buy an EV or upgrade to a heat pump, which can be used flexibly..
3. Using existing infrastructure better. The advantage of nodal pricing isn’t just that more infrastructure will be built in places where it’s more useful, but the infrastructure itself will be used more efficiently too. Let’s stick with batteries in West Texas. What’s interesting about the Texan market, which by the way leads the US in adding renewables, is that not only are batteries located in response to local prices, but the way they’re used is different too. West Texan batteries make more of their money through trading energy (buying it when it’s cheap and selling it when it’s expensive to smooth out prices), while batteries in South Texas earn their money through grid reliability services (preventing blackouts when demand for power outstrips supply).
It’s not just batteries either. One of the ways that Britain’s grid manages the intermittency of renewables is through interconnectors (big cables connecting Britain’s grid to the grids of Norway, France, Germany, Belgium and the Netherlands). Yet, a single national price for energy does weird things with interconnectors. It can create situations where interconnectors end up making constraints worse forcing us to curtail even more renewable power.
For example, when the link between Scotland and England is over-congested but the national price remains high, it can lead to us importing energy from Norway into Scotland and force us to curtail even more renewable power. Under a locational pricing system, prices close to zero in a constrained Scotland would lead to us exporting power to Norway. The end result being cheaper bills for households across the country.
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Electricity isn’t the only example of a market where failing to take into account that supply and demand differ from place to place leads to bad outcomes. Tim Leunig (paywall) notes that driving examiners' pay is set nationally (with only modest allowances for regional differences), yet pay for driving instructors isn’t. The result is long waits for tests in the South East where instructors earn more teaching drivers than grading them. In the NHS, one study co-authored by the chair of the Chancellor’s council of Economic Advisers, found that patients are more likely to die in areas where market wages are higher than nurses’ nationally-set wages.
When prices are set too high, the result is a surplus. When we did it with farming, it led to butter mountains and rivers of wine. When prices are kept artificially low, it discourages supply from coming forward. It’s why the waiting list for rent controlled apartments in some parts of Stockholm is 20 years long. It’s only when prices reflect what things actually cost at the margin, that we get good outcomes.
The case for locational pricing is straightforward. Not only does it improve incentives across the energy market so that less of our energy bill goes to paying renewable generators to turn off, it also incentivises developers to build the right kind of infrastructure in the right place and incentivises communities to accept that infrastructure being built near them.
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Even though locational pricing has clear advantages over the single national price status quo, some influential groups are opposed. They argue that efficiency gains from switching to locational pricing are dwarfed by the impact it could have on investment. In a follow-up post, I’ll explain why their arguments aren’t convincing.
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