AFRY study finds that an enhanced national market is an insurance policy for GB electricity market reform

AFRY has developed two market design options for improved operational efficiency within an enhanced national market, and quantitatively compared the potential benefits with zonal market alternatives. The study found that improved arrangements for interconnectors, small-scale and energy limited assets within a national market could deliver significant operational efficiency gains. The potentially higher operational efficiency in a zonal market could be negated by small increases in investment risk, delays to implementation, or the possible political outcome of EU negotiations.

Key conclusions are:

• Possible welfare gains from operational efficiency improvements, whether from a zonal or enhanced national market, are small (less than 1% of consumer bills) based on the latest network development plans.
• An enhanced national market design with improved arrangements for interconnector, small-scale and energy-limited assets has the potential to deliver significant operational efficiency gains.
• Of the enhancements to a national market design considered, improved arrangements for interconnection have the largest potential to deliver benefits but are dependent on collaboration between transmission system operators (with political support where needed) to bring mutual benefit; more ambitious arrangements may require EU-level negotiation.
• The potential welfare gains from improvements for small-scale and energy-limited assets within an enhanced national design are smaller but more easily achieved than changes for interconnectors.
• A zonal market alternative could have a more positive welfare gain, but also a significantly negative one if operational efficiency gains are outweighed by increased investment risk, delayed implementation, and any measures from the EU to limit welfare transfers to GB.

With several interacting areas of reform, failure in one area of an enhanced national market design does not mean that all or even most of the potential welfare gains would be lost. Many of the required changes would add significant value, even if a zonal market is ultimately implemented.

“AFRY’s work has shown the potential for improvements to the existing market design.” says Stephen Woodhouse, Director at AFRY Management Consulting and market design expert. 

Read the Key Messages, Executive Summary and Summary Report here           

Sign up for the study webinar on 3 March 2025 at 2pm GMT here

Background

AFRY has undertaken a 4-month study to develop enhanced national market designs. The study builds on work undertaken in 2022-2024 by AFRY. 

The latest study was funded by 7 industry members and supported by 4 observers. The views presented represents the independent opinion of AFRY, and the opinions may not be attributed to any of the parties who supported the process.

AFRY Management Consulting works globally on market design and provides commercial analysis, strategic and operational advice for private investors and operators, state owned entities, governments, and regulators. With experience of a wide range of global electricity markets, AFRY Management Consulting experts possess a deep insight into the merits of alternative electricity market designs.