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Electricity System Operator Market Design Framework

Summary

Earlier this year, LCP Delta was commissioned by National Grid ESO (Electricity System Operator) to perform an independent assessment and analysis of how the ESO is performing against the market design objectives of efficient design, efficient dispatch and value for money.

Whilst the analysis found that the Electricity System Operator is generally performing well against its market design framework, the key findings from the report included:

🟠Most products are partially aligned with the competition principle – despite this being a priority focus for all products. The ESO should ensure that enhancing competition (often through increasing participation) is considered further. This would ensure net-consumer benefit is maximised.

📈Through HHI and top three and five company ratio analysis the concentration of the ESO’s markets suggest a competitive market place is exhibited. However, for STOR and Dynamic Moderation, the ESO should continue to monitor its liquidity – as they show signs of imperfect competition, particularly on an individual auction basis.

💷The system services (particularly Pathfinders) show good signs of incentivising investment. We find that this is required for new technologies meeting system needs, as they aren’t necessarily valued elsewhere (eg. the CM). Energy balancing services provide ‘investability’ through providing dependable short-term revenue streams that make up a blend of a providers revenues to make a viable business case. The ESO should focus on maintaining good transparency to market participants and consistent procurement that meets participants expectations.

💡We find clear signs of wholesale market interaction with energy balancing services as they compete for the same supply – times of significant opportunity cost leads to market exits. Also, less of the Dynamic Response services bidding behaviour is generally linked to wholesale power market (price and spread) – and we pick up on other drivers.

🗓There’s a risk of inefficient unit dispatch from an increasingly congested and complicated Day-ahead trading session. In favour of sequential auctions (multiple auctions for individual services), the ESO is looking to implement co-optimised auctions which would ease this congestion and should decrease the risk of inefficient dispatch.

📊 We found that the BM is least well aligned with the framework. The BM is an imperfect marketplace, but it is a vital mechanism for managing the system. We do not propose fundamental reform, rather, the ESO should continue its reform of balancing services as per the Markets Roadmap to minimise the need for the BM to address system needs. In the interim, ESO should focus on increasing participation and competition.

Read the Executive Summary here and access the full report here.

 

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