Sensitivity analysis on the modelled benefits of zonal electricity markets in Great Britain

AFRY’s previous analysis of a potential zonal power market in GB has found that the benefits are low while the risks are high. AFRY’s latest study has assessed alternative analysis, and we find that zonal welfare benefits are overestimated by the use of "off the shelf" scenarios with unrealistically high levels of network constraints that are sustained into the long term.

In particular, AFRY finds that combining the patterns of generation and demand from National Energy System Operator (NESO) Future Energy Scenarios 2024 Holistic Transition Pathway and Beyond 2030 network plan (including Clean Power 2030 amendments) "off the shelf” results in a scenario with sustained high levels of network constraints, and an overestimate of the welfare benefits from improved dispatch efficiency in zonal market.

Partially adjusting this "off the shelf" approach to reflect the more dynamic reality gives a more credible view of zonal dispatch efficiency benefits.

Other conclusions:

• Even in the high sustained congestion scenario, overestimated zonal welfare benefits from improved dispatch efficiency remain small relative to consumer bills
• Across a range of scenarios with a range of network congestion levels, zonal dispatch efficiency gains remain sensitive to cost of capital risk
• Wealth transfers from interconnected markets to GB are a significant share of the potential benefit of a zonal market for GB (and higher in scenarios with high GB network congestion); a possible requirement to compensate interconnected markets for this wealth transfer under a renegotiated EU-UK Trade and Cooperation Agreement would put of large share of the gain to GB at risk
• Consumer welfare benefits will also be overestimated in scenarios with unrealistically sustained levels of network congestion (on the assumption that consumers receive all intra-GB congestion rent in a zonal market), and if there is a systematic bias towards generators being less profitable in a zonal market but with no impact on consumers (e.g. by assuming CfD strike prices remain fixed)
• Improved whole-system planning within a national market can deliver significant welfare improvements, and negate the benefit of a zonal market