5 ms·

Zonal also has issues with congestion, lack of locational price signals, and something called inc/dec gaming. A Nodal design (like in many US wholesale markets)

Zonal also has issues with congestion, lack of locational price signals, and something called inc/dec gaming. A Nodal design (like in many US wholesale markets) fixes this, but some of the key policy makers are reluctant to go in that direction as it would be a ~7 year project and would introduce revenue uncertainty in the meantime when they are trying to decarbonize and need to make it easy for developers to get financing. Both pro/against arguments for nodal pricing have merit. There have been many discussions on this in government. Marginal cost based pricing is extremely unintuitive to those outside of the field, but nearly all economists support it. The reason is that this eliminates a lot of the gaming in pay-as-bid designs and helps incentivize investment in more efficient/cheaper generation, while driving out less efficient clunkers that may not be profitable anymore. The reality is of course far more complicated. These markets have saved untold amounts of money by optimizing over large regions, but you can also point out "missing money" problems where there simply isn't enough investment in generators with access to firm fuel (as opposed to when we just had monopoly utilities). As a result, much of the US has an "at risk" or "very high risk" of not having enough generation during summer/winter peak.

singhrac 2y ago
Yeah, I'm not sure I understand your argument here. I work in the area. I can understand revenue uncertainty, but the solution is to sign a PPA. When Texas transitioned to a nodal market many existing generators got grandfathered into zonal pricing via free options, which is doable (e.g. any project built in the next 5 years will get this free option). Give me an example of a "missing money" problem. I don't think these problems exist when you have capacity markets or ancillary service markets with enough incentives to exist (e.g. payments for standing offline, ready to turn on). The big issue with UK power markets is that there is no incentive to build a huge power line down the country right now that delivers power from Scotland (where there are huge wind resources) to the rest of the country. Texas did this (very very successfully) with the CREZ. The UK has many many competent engineers and making the energy grid more efficient is an attractive opportunity for many.
- 7thaccount 2y ago
  I've also worked in the area for many years. PPAs typically require the bank to be counterparty and that requires a forecast of the prices that will be received in the market over a lengthy period. The folks at Ofgem talked about how going nodal would be nice, but that they are worried about it being such a big project (these markets typically take 5-7 years to go from design to implementation in the US) that would take focus away from what is already mostly working for them. Overall, completely changing the market structure leads to uncertainty that investors don't like. The grandfather point is a good one. Something could possibly be done there, but not sure of the complications. The missing money problem is very much a real thing. You're right that capacity markets and other resource adequacy mechanisms create side payments to fix this, but not everyone has that. Texas infamously had an energy-only design that hasn't worked out so well and is why they have so many ongoing proposals like the PCM to address the reliability issues. It is also why fast start pricing has been pushed so hard by FERC. Even with the capacity markets, there are numerous issues such as the extremely high prices in PJM that is leading to numerous lawsuits and condemnation from their independent market monitor. The markets work well at reducing costs, but there are a lot of ongoing issues being addressed in numerous stakeholder groups and at FERC.
  - singhrac 2y ago
    Sorry, I didn't mean to imply you hadn't, just offering a reason why I had a strong opinion. Am I misunderstanding what you mean by counterparty? In the US, banks provide the tax equity and sometimes the project finance, but the PPA counterparty is a consumer, i.e. a utility or a large load (e.g. tech company data center). The forecast is necessary, but like I said, the uncertainty can be hedged. Well, I'm talking about how linking a nodal market to a capacity or ancillary service market is necessary (i.e. purely nodal market without payments for reliability don't make sense). Texas's energy-only design would not have been saved from the 2021 disaster via a capacity market or a zonal price (gas availability dropped by 45%). I think the PCM was always misguided and unnecessary (from just cursory understanding). I don't have time to respond to all the points about various capacity markets, but unfortunately a busy time of year, and will respond later.

singhrac 2y ago

Yeah, I'm not sure I understand your argument here. I work in the area. I can understand revenue uncertainty, but the solution is to sign a PPA. When Texas transitioned to a nodal market many existing generators got grandfathered into zonal pricing via free options, which is doable (e.g. any project built in the next 5 years will get this free option). Give me an example of a "missing money" problem. I don't think these problems exist when you have capacity markets or ancillary service markets with enough incentives to exist (e.g. payments for standing offline, ready to turn on). The big issue with UK power markets is that there is no incentive to build a huge power line down the country right now that delivers power from Scotland (where there are huge wind resources) to the rest of the country. Texas did this (very very successfully) with the CREZ. The UK has many many competent engineers and making the energy grid more efficient is an attractive opportunity for many.

7thaccount 2y ago
I've also worked in the area for many years. PPAs typically require the bank to be counterparty and that requires a forecast of the prices that will be received in the market over a lengthy period. The folks at Ofgem talked about how going nodal would be nice, but that they are worried about it being such a big project (these markets typically take 5-7 years to go from design to implementation in the US) that would take focus away from what is already mostly working for them. Overall, completely changing the market structure leads to uncertainty that investors don't like. The grandfather point is a good one. Something could possibly be done there, but not sure of the complications. The missing money problem is very much a real thing. You're right that capacity markets and other resource adequacy mechanisms create side payments to fix this, but not everyone has that. Texas infamously had an energy-only design that hasn't worked out so well and is why they have so many ongoing proposals like the PCM to address the reliability issues. It is also why fast start pricing has been pushed so hard by FERC. Even with the capacity markets, there are numerous issues such as the extremely high prices in PJM that is leading to numerous lawsuits and condemnation from their independent market monitor. The markets work well at reducing costs, but there are a lot of ongoing issues being addressed in numerous stakeholder groups and at FERC.
- singhrac 2y ago
  Sorry, I didn't mean to imply you hadn't, just offering a reason why I had a strong opinion. Am I misunderstanding what you mean by counterparty? In the US, banks provide the tax equity and sometimes the project finance, but the PPA counterparty is a consumer, i.e. a utility or a large load (e.g. tech company data center). The forecast is necessary, but like I said, the uncertainty can be hedged. Well, I'm talking about how linking a nodal market to a capacity or ancillary service market is necessary (i.e. purely nodal market without payments for reliability don't make sense). Texas's energy-only design would not have been saved from the 2021 disaster via a capacity market or a zonal price (gas availability dropped by 45%). I think the PCM was always misguided and unnecessary (from just cursory understanding). I don't have time to respond to all the points about various capacity markets, but unfortunately a busy time of year, and will respond later.