On September 17, European Commission President Ursula Von der Leyen included a remarkable point in her mission letter for the incoming Energy Commissioner — advance the system integration of solar and wind by improving locational price signals. How could that work, you might wonder?

Now we could introduce RAP’s Power System Blueprint deep dive on implementing ‘nodal pricing.’ As explained in the deep dive, nodal pricing generates wholesale prices that reflect the confluence of wholesale costs and the real-world limitations of the grid to convey energy, and is the form of locational pricing that presents the most locationally granular signals.  

We could also introduce RAP’s Blueprint overview of the merits of locational pricing, and point to independent analyses like this and this. But instead, we’ve developed a habit of imagining how this would go in the form of a showdown discussion with an inner teenage skeptic version of ourselves.

Old Dominic: First, why on earth do we care? Well, nodal pricing is a way to lower bills for electricity users, and build a better, more flexible grid. Now, this subject area is pretty complex. So, I’ll spell it out. Then your challenge is to summarise it. OK?

Young Dominic: Okey doke. (chews on a lollipop, takes out Nintendo Gameboy).

Old: Right so. First off, the information provided by power plants and the like into energy wholesale markets needs to change. It won’t be enough to submit a single offer to cover an entire box of energy resources dotted across the country — rather, participants will need to provide more precise information by each location. This is because under a nodal regime, prices will diverge between areas. 

Young: Newsflash. A more locationally granular system requires locationally granular information.

Old: Less sarcasm please. Another informational change is that participants will likely need to provide much more detailed information about their operational costs and abilities, such as the cost of turning on and minimum run levels. This richer set of information helps the least-cost pattern of resource deployment to be identified by the market operator. To help resources recover all their costs, extra ‘uplift payments’ might be used, allowing existing sticking plasters (called block bids, don’t ask…) that were introduced to help ensure cost recovery, to be cast off, in turn allowing for speedier run times by the algorithm. This could be good news because some people think the current system to optimise European day-ahead auctions is nearing its operational limits, and would struggle to accommodate enhanced locational granularity.

Young: Ok. Richer information on cost. Quicker run-times. Better optimisation results.

Old: Governance changes may be necessary. 

We might reorganise who does what in the markets. For instance, there is a question of whether day-ahead markets should be run by a single new operator that covers both the market of energy resources and the grid. Currently day ahead markets are run by third party entities called NEMOs (Nominated Electricity Market Operators) that do not have direct oversight of the capabilities and limitations of the grid that the system operators do. With the extent to which the contours of the grid can affect prices under nodal pricing, it may make sense to rethink this.

Similarly, a nodal pricing system makes more visible the abuse of market power at any location, and therefore typically motivates a more hands-on approach to addressing it. This requires assignment of duties and resources to a well-resourced entity dedicated to this task. 

Also, as market participants start seeing individual prices tailored to their specific location, they may demand higher confidence that the price formation process is not prone to conflicts of interest between the entity generating these prices and the entity that owns the lucrative transmission wire business. This might motivate further separation of transmission businesses from system operation. Britain is leading the way in this separation in Europe, and indeed making the newly separated entity a government-owned organisation. 

Young: (Starts doing keepy-uppies with a football.) Got it. Synergies with market operation and system operation. Sort out market monitoring. Think about whether wires business might be separated out from other system operation business. 

Old: Coupling — the process of facilitating trade across borders — may be the biggest challenge. When Poland took a long look at introducing nodal pricing, they found that the closer to real time you get, the harder it was to implement an efficient coupling mechanism. Researchers are increasingly looking to the U.S. for lessons in this regard. And the solution may also point to independent system and market operation across multiple jurisdictions. More generally, introduction of regulatory obstacles might be best avoided by establishing a clear European vision towards a nodal pricing end-state, as proposed in RAP’s Power System Blueprint.

Young: Question. What’s the thing with zonal pricing? I’ve heard it’s like nodal pricing with big nodes. Or nodal pricing is like zonal pricing with tiny zones.

Old: Kinda. It’s a big improvement on absence of locational prices, and can unlock a good portion of the benefits of nodal. Internationally, we see it´s often a stepping stone on the way to introducing nodal pricing.

Young: Interesting. Overall, seems like quite a cutting-edge area of inquiry. Are comments welcomed here? 

Old: Wow, it’s like you read my mind. As though this piece were in fact written by one person. Which it most definitely is not. Right?!  

Young: Right!