These supertraamps are led by National Grid, who have long supported nodal pricing. The reason is that they can collect congestion rents and justify ever more investment in grid capacity with a guaranteed minimum return to "solve" the problem. The real problem of course is in investing in generating capacity that is nowhere near where the demand is. Before we had a grid at all towns would have their own power stations (and town gas manufacturing) so they were close to where the demand was. The early grid allowed electrification to be spread to out of town areas, and it allowed power stations to act as mutual backup. The next stage was building large power stations close to coal pits (think Longannet, Drax, Aberthaw, but these were mostly close to large centres of industrial demand. We ended up with a grid that 20 years ago was able to deliver 400TWh/a to customers. Since then, the investment in the grid has already doubled, and yet we only supply 270TWh/a. The grid has already become vastly less efficient in order to accommodate renewables, and National Grid and now NESO have promoted the high network cost design.
There are two sides to the issue of grid regional pricing (there are also regional differences in pricing already due to differing distribution level charges). On the one hand, the transmission gird has to be built and paid for. That is formally handled by the TNUoS charges. The method of allocating these was to estimate the power flows at each grid connection point with and without the generation or demand it services under a variety of supply/demand scenarios, and thus to calculate a "fair" share of the cost. In areas where demand was greater than supply, a generator could have a negative share of cost, while the consumer element (at least for major consumers) was a cost to be added to bills. The obverse applies in areas with a generation surplus, resulting in incentives to locate generation closer to demand.
This became increasingly controversial as renewables started to be added to the grid, since a Scottish windfarm would be liable for the costs not only of hooking up to the grid, but also of providing extra grid capacity to be able to flow output potentially all the way to the French interconnectors for export. Such costs were unaffordable, so Alex Salmond persuaded government to give the Scots a favourable deal. OFGEM have progressively moved towards charging TNUoS costs to demand. Later, the EU took a hand:
Commission Regulation (EU) No. 838/2010 (which is retained EU law) sets out that the annual average transmission charges paid by producers in Great Britain must fall within €0-2.50/MWh.
The range is somewhat higher: actual charges are annual per kW of capacity connected to the grid, so to convert to £ per MWh you need to divide by 8.76 and the average capacity factor achieved. The expensive end is around £6/MWh, and the cheapest (reflecting the lack of nuclear from Hinkley Point currently) is about minus £1.40/MWh. Interconnectors are not charged AT ALL, giving overseas generators a competitive advantage. However, charges to generators only cover about 10% of TNUoS costs (around £4.2bn this financial year, or about £140 per household overall): the rest is allocated to demand, with small to medium businesses particularly badly hit.
Locational pricing is an alternative to cost allocation based charging. When you isolate markets in this way you will see a much greater proportion of prices at extreme levels. Shortage pricing gets set by prices at which demand is cut, mainly by industry, while surplus pricing is really determined by the local economics for curtailment, which depend on subsidy deals. The question about the allocation of curtailment costs paid over also arises. When import or export capacity is reached for each location these pricing mechanisms apply. Regions can be similarly priced where there is no transmission constraint. Whether or not a constraint is binding depends on what is happening in adjoining areas: there may be no local constraint between the Highlands and Lowlands of Scotland, but if the wind isn't blowing there has to be sufficent capacity to supply the demand from England, so the Highlands will see the English border constraint.
This is a bit niche but for those who are interested I have just published a piece on some of the deep roots of why We Are Where We Are. Hint: it’s Consumerism, any comments greatly appreciated.
An example of regional nodal pricing is Norway (and Sweden). Norway’s electricity generation is almost exclusively from hydro, so the costs are heavily dominated by the facilities and the poles and wires that deliver to customers. The result is that per kWh charges are very low (often under 1p/kWh, so they can afford EVs and heat pumps), with most of the bill being standing charges to cover the cost of the assets. So long as each region is adequately supplied it has little need for strong transmission links to other regions, except when plant is under maintenance, aside from needing to import mainly from nuclear Sweden in years with poor snowfall/snowmelt in exchange for some cheap export in wet years. Production can vary between ~100-145TWh/a.
However, since the populous NO2 region in the South started connecting more to Europe and the UK the result is that they import shortage prices via the interconnectors. These no longer occur just in years with low precipitation, but any time Dunkelflaute strikes.
The other regions have no interest in connecting more transmission (who pays for that?) to increase their local prices while perhaps exporting some of their output. Indeed, Norway as a whole has refused to implement a new interconnector to Scotland, and is considering not renewing contracts on interconnectors to Denmark and the Netherlands.
James Twallin has done some interesting work, particularly on estimating what wind might have generated if it has curtailed because of negative prices and isn't being paid: I've come across him before. Unfortunately, I can only see the first post in the thread as I am not on X. But it points up the huge levels of curtailment at Seagreen offshore wind farm. The saving grace I suppose is that the average cost of these is only £28/MWh.
Seagreen is nominally on a CFD, but it anticipates not commencing the CFD until the last permitted dates, stretching out to 2028. In the mean time, it gets market prices for its output instead of its currrent CFD strike price of £54.64/MWh, plus curtailment payments. Clearly, it curtails when that is more profitable than producing at market prices.
It is highly illustrative of what will befall the large wind farms further South as capacity increases to create more hours with curtailment required. Those with no protection against negative prices will be first in line to curtail and therefore will dominate curtailment, and as there are more and more of them curtailment will be subject to increased competition eroding revenues. These wind farms could easily get stretched financially. It will be interesting to see the next Seagreen accounts which will cover a period of full operation.
Meanwhile the heavily subsidised wind farms will have no incentive to curtail at all.
The fact that all our energy companies, Octopus included, claim their electricity is 100% renewables proves that they are lying grifters.
Our Lab/Con/Lib/SNP Uniparty politicians used to go on about how vital it was for us to “tackle climate change”. They never say it nowadays because the official aim now is simply to reduce (to net zero) the UK’s share of global greenhouse gas emissions, less than a paltry 1% of the total. I’ve seen it baldly stated on a gov.uk web page but unfortunately, I can’t find it again.
This is how they justify charging ahead with Net Zero unilaterally when it is obvious that most of the rest of the world will never follow suit, rendering it a totally pointless endeavour even if the climate pseudo-science they use to justify Net Zero were valid, which it isn’t.
There are times in the year when a claim such as that by Octopus could be true, but conversely, given the customer numbers, low renewables output, the typical domestic consumption values determined by OFGEM and the actual system demand, there are many, many occasions where it is impossible to satisfy the customer numbers they have with renewables to anything more than single digit watts, which is a very tiny and insignificant proportion of the customers actual demand.
But get them or OFGEM to admit they are talking bollocks isn’t going to happen. For instance it can be repeatedly observed that when questioned on precisely these points chatty ‘Greg’ and customer service regularly just go into ‘quiet mode’
Here’s a US senator quizzing a US Energy Secretary: “If we spend $50 trillion on reducing our emissions how much will that reduce global temperatures”. No answer, just stonewalling: https://x.com/Artemisfornow/status/1863168913988600276.
1. The electricity is not free, the cost is paid by someone else, in this case, the consumer.
2. Electrolyzers need to operate at a certain capacity factor to pay back their capital cost and the fixed portion of their operating cost. Although they can be operated as a flexible demand, such operation is only viable if enough surplus renewable power is available to reach the capacity factor for an economic operation. A large electrolyzer, designed to soak up most of the surplus power would not have enough equivalent full capacity operating hours to be viable. A small electrolyzer would not be able to soak up enough of the surplus power. I have shown in a substack article, based on an analysis of UK wind capacity factors, that an electrolyzer can only operate with a 50% capacity factor after surplus renewable energy reaches a 30% curtailment.
3. The produced hydrogen needs a user. If that user is a generator providing power in times of a renewables deficit, then the production and use of the hydrogen are totally out of sync, and vast quantities have to be stored. If the user is transportation or steelmaking, the demand is steady and continuous, significant storage is also needed.
4. Above ground storage of hydrogen is very expensive. The only viable storage for the quantities required would be salt caverns. A hydrogen pipeline would be needed from the electrolyzers to the storage caverns, or an electrical transmission line to electrolyzers located at the storage caverns, which of course eliminates the reason for building the electrolyzers near the power source.
5. All of this additional cost (electrolyzers, pipelines, transmission, generators etc) would allow only a small portion of the surplus wind power to be used, with an abysmally low efficiency providing just 1 Kwh of power output for every 3 Kwh of input.
The people suggesting this just haven't thought it through, or perhaps they have thought it through and they are simply part of the vast, subsidy chasing great green grift, and they expect the public to buy into the scheme and keep the grift going.
I looked at surplus duration curves at various levels of wind capacity (they are multiples of the 22GW we had installed when I ran the numbers 4 years ago now). The maximum capacity factor for the first MW of electrolyser is given by the x axis intercept of the duration curve. The intercept on the y axis gives the largest surplus that occurs, and defines the capacity you would need to install to capture all the surplus. Mouseover each curve and read off the maximum installed electrolyser capacity consistent with a given minimum utilisation rate. All production in the triangular area above and to the left of the chosen point must otherwise be curtailed.
I also think you are absolutely right to highlight the issue that the volume of output that has a positive value declines as wind capacity is increased, effectively multiplying the real cost of a marginal wind farm. This chart is one way of looking at it:
Thank you, David, for your clear analysis and explanation.
"In the Government’s REMA consultation document, they explain how the negative pricing rule has evolved. In Allocation Rounds 2 and 3, if the day ahead price falls below zero for six or more consecutive hours, no CfD payments are made. This rule was tightened in AR4 and beyond so that no CfD top-up is paid if the day-ahead price goes negative for any day-ahead period.
Of course, it is obvious that wind farms produce most when it is windy. So as wind capacity increases, the market value of most of their production is going to be zero, or less. They need large, flexible sources of demand close by to keep prices above zero. We can see that Jackson’s plea for locational pricing is little more than a way of protecting newer wind farms from zero prices so they can continue to harvest subsidies rather than receive nothing for most of their output."
I *had* heard that Wind producers especially were ultra-keen on building new 'green' hydrogen production as a way of increasing Demand in times of Wind surplus... but I didn't understand their motivation until your post.
As you say, UK energy policy is being run for the benefit of intermittent energy producers, not customers. As I have often said, the moniker "DESNZ" is no longer accurate: it is solely "DNZ".
This is a brave attempt to debunk the utter nonsense that #GrifterGreg and his collaborators come out with David. I have been thinking about an article on locational pricing myself for a while, but it's such a complex heap of 🐎💩 that I just haven't been able to figure out a clear way to explain it to a lay audience.
Of course, there will be frequent occasions in an overbuilt wind scenario when there is a large excess of "free" 🔌 (at marginal cost). It might - in some circumstances & if hydrogen production storage technology were viable & mature - make sense to produce hydrogen with that excess. But that has little or nothing to do with locational pricing per se.
The bottom line is that, of £3.4 Trillion total UK NZ costs, "only" about £350 billion of that is for the transmission grid, and only a tiny fraction of that could be saved by co-siting new industries (hydrogen production, AI centres etc.) alongside offshore wind connections. Maybe 10%. Let's be generous & call it £50 billion, so the cost of NZ drops to a mere £3.35 Trillion.
I have direct experience of this type of favourable treatment for selected industries - specifically, aluminium smelters adjacent to hydro plants in Africa. They ended up taking all the power, at near zero rates, leaving the rest of the country to pay much higher costs and to experience frequent blackouts. The UK might (in earlier, saner, less corrupt times) be able to arrange things slightly better, but the law of unintended consequences still applies, and the road to hell is paved with good intentions as they say.
TLDR: Locational pricing, like everything else to do with Net Zero, is gaslighting lunacy.
Richards Bay and Mozal both depended on South African coal generation up on the veld at mine mouth. There were attempts to link in to Cahora Basso hydro, but that is hardly next door. Neither is Mozambique LNG , if it ever gets going. There were still substantial coal exports from the mines in addition to generation for Joburg/Pretoria etc. Of course, BEE has seen Eskom become corrupt and no longer able to maintain its operations properly or ensure it gets paid for output.
Gateshead have a very efficient gas turbine, but are now also using a mine water bore scheme which uses a heat exchanger, as well as a solar farm. So it’s a combination of sources. Passed the mini power station the other day, it’s in the middle of Gateshead, wonderful initiative... see my essay for a full description
Ive seen the mine water idea a while back and actually that's feels a worthy idea that should be exploited wherever it can although don't know how useful it would be (clearly only in former mining areas). Is there a govt scheme to drive it forward?
This is really interesting. I think the penny is beginning to drop that the massive expansion of the Grid is not the silver bullet we are being told it is.
Why aren’t other options like local generation with combined heat and power plants being explored? Gateshead has a wonderful example of a local area network.
All this new house building could include local generation. Carpeting the country with pylons is not the answer to our energy problems. I’ve written a short piece about some alternatives...
Agree, but I still don’t understand why it’s not compulsory on new builds to include solar and battery.
At bulk, say a 100 unit development the unit cost would be minimal % of the property sale price.
No heavy duty grid connection needed, use local what’s generated locally 🤷♂️
I have a modest solar system, and averaged out over the year I pay nothing for electricity, if the standing charge wasn’t so ridiculous I would be in profit.
I do understand. We have a technically illiterate political class, that’s why who wouldn’t know the difference between a transformer and a children’s toy of the same name. And of course the house builders have far too much influence on the political system. We need to start the engineering equivalent of banging dustbin lids on the ground before lights go out…..
So how does locational pricing work when the wind isn't blowing do they get charged more for sending power to them from down South? Anyhow most power is bought on the forward mkt months / years ahead and thats never sold at negative prices. It does go negative on the day ahead mkt but commentators focus on the system price as though that is what we are all paying - it isn't.
The fundamental issue is OFGEMs connect & manage policy has allowed generation, however unreliable, to outrun transmission capacity and create the constraint nonsense we now see. This will be fixed to a degree with the Eastern DC Links which incidentally should have been built years ago but OFGEM would never sanction the expenditure. (Oh and it will reduce occurrences of negative SPs as well). Now OFGEM have flipped the other way and are doubling down on letting the TOs build ahead of planned windmills which may never be built. If your going to go down the route of anymore NZ generation at least do it in a coordinated way so that the transmission capacity is there from day 1 and factored into the cost and deliverability.
Anyhow back to your article im fearful that Millibrain will push this through as it will give him something to hang his hat on about saving consumers money. I'm also now convinced that Reeves isn't stress testing anything out DENZ to see whether it encourages or discourages growth so she wont stand in his way.
This is a good question/comment & it highlights 2 reasons I say "it's such a complex heap of 🐎💩" in my previous comment.
For something like hydrogen production, intermittency wouldn't be a problem (notwithstanding David's comments about storage facilities! ) - as operations could be ramped up & down depending on the availability of wind.
Actually, intermittency is a problem for hydrogen. Electrolysis really needs steady process conditions for maximum efficiency, otherwise the efficiency can be hit quite badly. That is quite aside from the issue of whether utilisation is so low that capital cost escalates alarmingly per unit output. Since demand fluctuates diurnally, surplus hours are more likely to be at night for a few hours.
I am watching to see what happens with the Poshydon project in the Netherlands. It seems that onshore testing has run into snags, as they are now way behind schedule on announcing installation offshore.
But for a 24/365 AI data centre, they'd need an alternative - either backup generation on site, or a grid "backfeed". It might be that existing transmission connections were of sufficient capacity to provide the backfeed, but you'd still then have to cater for potentially excessive transmission losses - and of course for high marginal costs of whatever low-merit-order generation was called upon from the remote location.
Most large data centres make sure they are physically located close to a major dispatchable generator to minimise risks of loss of power supply. Like this
Furthermore, as you say, you have forward sales to think about - how does that work in a scenario where a new steel plant, for example, has contracted for the full average output of its local wind farm. When the wind drops, the Supplier (the wind farm) potentially has a massive short position to close, typically by buying from a little-used fossil fuel backup plant at the other end of that transmission backfeed.
Wind farms tend not to take much performance risk. Contracts typically allow them to nominate how much they will supply quote close to actual delivery time, when the weather forecast is much more reliable. Corporate buyers will have a further contract for supply from other sources to cover their full needs. In fact, usually the whole caboodle will be managed by the balancing supplier (e.g. SSE), who may also at least part own the wind farm
"a further contract for supply from other sources".
Indeed. We're saying essentially the same thing: co-siting any energy intensive industry with an intermittent source of supply makes no sense at all, except to the disingenuous climate catastropist cult loonies.
David - I would like add a couple of points based on my experience of REMA and nodal pricing. In principle I am strongly in favour of it but you can never trust DESNZ to do anything competently. That leads to my first point. A couple of years ago I participated in the early online meetings in which the goals for REMA were discussed. The crucial point that came over was that DESNZ was entirely captured by the concerns of renewables lobbyists and related parties. The overwhelming concern was how to make life easier and more profitable for investors in battery systems. The Department's interest in consumer interests was minimal because the staff was preoccupied with responding to lobby groups. This is a classic example of a ministry that is dominated by producer interests.
Second, I have spent a lot of time recently studying the PJM market, which is the largest regional transmission system in the US by population. It uses nodal pricing, which works well. The differences in area prices are relatively small with nodal premia rarely more than 10% of the base energy price. However, there is a crucial difference with the way PJM works and the views espoused by Octopus. In PJM it is supply - not demand - which moves in response to nodal price differences. No-one expects a chemical plant to move from New Jersey or Pittsburgh to Virginia. However, utilities locate and operate their gas plants where they can take best advantage of nodal price differences.
The point here is that renewable producers like Octopus want everyone else to fit in with their convenience and profit. In PJM the utilities and system operator understand perfectly well that most large energy users don't see the choice as being one of moving from NJ or PA to Virginia. If electricity prices are too high where they are now, they will move to the Middle East or Asia. That, of course, is what is happening in the UK but the Department and renewables firms can't admit that. So what you get is the ridiculous idea of moving very expensive and completely uneconomic uses like electrolysis, because, after all, they are heavily subsidised and what difference does a bit more subsidy make. It is all a self-sustaining fiction in which the idea that UK businesses have to compete in the rest of the world is simply ignored.
Gordon, you are quite right that industries are unlikely to relocate, but new industries would be in a position to game the system - & they would, to everyone else's detriment.
See my previous counterpoint about aluminium smelters adjacent to hydro plants in Africa.
Entirely correct but not new. The same has happened for aluminium smelters in the UK and several other countries. Power plants next to coal mines are a variant. There can be a logic in minimising transmission & transport costs but often it is the consequence of credulous behaviour by governments which over-estimate the benefits of some kinds of industrial development. Smelters are a very good example of that.
My experience at the NESO FES25 planning event last week bears this out. Totally captured by producer interests. The consumer voice barely gets a look in.
I agree nodal pricing could work well if supply could respond to price signals. But as you say, what we have is inflexible supply, so nodal pricing can only help those generators harvest more subsidies.
Gordon very interesting insight into the way DENZ operates and so they must be delighted with an eco evangelist like Millibrain turning up to double down. This unfortunately convinces me now that they will bring in REMA.
Separately though i thought there were already indirect incentives on use of system charges such that generation in the SE is charged less now?
Ed Miliband fixed it in the Energy Act 2010 just before the 2010 election. It provides that OFGEM should give priority to green interests which are deemed to be in consumer interest.
Transmission Network Use of System charges are now almost entirely allocated to demand following an OFGEM decision a few years ago (one reason why standing charges have increased so much), so there is no locational incentive any more for generators, beyond where they might stand over being curtailed or dispatched. Alec Salmond did a deal to ensure that Scottish wind was favourably treated long before that.
Oh yes forgot about that stitch up but generators still have to pay c25% of the charges to cover the costs of operating the transmission system. Which as an aside i see are forecast to rise a fair bit next year as NESO have increased the initial allowance for new build further as a result of OFGEM sudden found philanthropy towards transmission operators
Thank you David! The contrasting conclusions of Octopus and SSE brought to mind George Canning's "I can prove anything by statistics except the truth". I guess a lot of reports are commissioned to bolster the desired outcome.
My simple mind struggles with many of the concepts around electricity supply. I thought that the very purpose of a grid was to convey electrical energy from source to use - hence the 'National' In National Grid.
I also have a word for something that needs to be provided in massive excess, requiring backup to account for its vagaries - waste.
Running two sets of generation is wasteful and certainly wont deliver lower cost but it is a necessary evil if we need to lower our carbon emissions and still keep the lights on. Politicians should be honest about this and Millibrain had an opportunity to recalibrate the response such that at least real UK jobs were created in delivering it not supporting jobs in Europe and China.
I think the real take away for me is that Gateshead are taking control of their own energy needs and won’t be held to ransom by giant corporations. The islanders of Eigg who run their u in en micro grid are taking the same approach. IMO we need to get away from the bigger is better mindset, there’s a point at which the ‘economies of scale’ mean handing over our fate to giant corporations...
The reason we ended up with the grid was to eliminate all the backup plants that each local undertaking had to have to cover peaks and plant outages. Invariable those plants were highly inefficient and polluting compared to best plant in the day so this risks going back to the same situation.
But we've moved on since, new plant doesn't have to be polluting, nor inefficient. It might have been good in the 1950s, but more of the same doesn't necessarily make it better. What I'm suggesting is to take a step back and look at the overall energy picture as Gateshead did.
I have been trying to explain to friends for years that all these “innovations” are the result of trying to fix a system that is fundamentally broken by NetZero policy. It’s incredible, even to me, how far this “they” want this to go. Someone told me the other day that we’ll soon be powering the grid from EVs. I just don’t have the patience any more to argue against this level of stupidity / ignorance / gullibility.
I was thinking the same thing reading this. Volatility has been created for profit much like how after 2008 oil markets saw volatility in futures orders of magnitude larger than normal because banks were speculating trying to recoup losses from the MBS crisis.
Here we have an engineered system with a volatile input that propagates and even amplifies that volatility through the price market. Completely artificial and based on ideology as much as grift.
The solution to price volatility is building redundancy and a much more stable energy network. But that means slandering the God of Climate Change.
REMA, you say you are a reamer!
Can you put your hands on your head? Oh no!
These supertraamps are led by National Grid, who have long supported nodal pricing. The reason is that they can collect congestion rents and justify ever more investment in grid capacity with a guaranteed minimum return to "solve" the problem. The real problem of course is in investing in generating capacity that is nowhere near where the demand is. Before we had a grid at all towns would have their own power stations (and town gas manufacturing) so they were close to where the demand was. The early grid allowed electrification to be spread to out of town areas, and it allowed power stations to act as mutual backup. The next stage was building large power stations close to coal pits (think Longannet, Drax, Aberthaw, but these were mostly close to large centres of industrial demand. We ended up with a grid that 20 years ago was able to deliver 400TWh/a to customers. Since then, the investment in the grid has already doubled, and yet we only supply 270TWh/a. The grid has already become vastly less efficient in order to accommodate renewables, and National Grid and now NESO have promoted the high network cost design.
There are two sides to the issue of grid regional pricing (there are also regional differences in pricing already due to differing distribution level charges). On the one hand, the transmission gird has to be built and paid for. That is formally handled by the TNUoS charges. The method of allocating these was to estimate the power flows at each grid connection point with and without the generation or demand it services under a variety of supply/demand scenarios, and thus to calculate a "fair" share of the cost. In areas where demand was greater than supply, a generator could have a negative share of cost, while the consumer element (at least for major consumers) was a cost to be added to bills. The obverse applies in areas with a generation surplus, resulting in incentives to locate generation closer to demand.
This became increasingly controversial as renewables started to be added to the grid, since a Scottish windfarm would be liable for the costs not only of hooking up to the grid, but also of providing extra grid capacity to be able to flow output potentially all the way to the French interconnectors for export. Such costs were unaffordable, so Alex Salmond persuaded government to give the Scots a favourable deal. OFGEM have progressively moved towards charging TNUoS costs to demand. Later, the EU took a hand:
Commission Regulation (EU) No. 838/2010 (which is retained EU law) sets out that the annual average transmission charges paid by producers in Great Britain must fall within €0-2.50/MWh.
The range is somewhat higher: actual charges are annual per kW of capacity connected to the grid, so to convert to £ per MWh you need to divide by 8.76 and the average capacity factor achieved. The expensive end is around £6/MWh, and the cheapest (reflecting the lack of nuclear from Hinkley Point currently) is about minus £1.40/MWh. Interconnectors are not charged AT ALL, giving overseas generators a competitive advantage. However, charges to generators only cover about 10% of TNUoS costs (around £4.2bn this financial year, or about £140 per household overall): the rest is allocated to demand, with small to medium businesses particularly badly hit.
Locational pricing is an alternative to cost allocation based charging. When you isolate markets in this way you will see a much greater proportion of prices at extreme levels. Shortage pricing gets set by prices at which demand is cut, mainly by industry, while surplus pricing is really determined by the local economics for curtailment, which depend on subsidy deals. The question about the allocation of curtailment costs paid over also arises. When import or export capacity is reached for each location these pricing mechanisms apply. Regions can be similarly priced where there is no transmission constraint. Whether or not a constraint is binding depends on what is happening in adjoining areas: there may be no local constraint between the Highlands and Lowlands of Scotland, but if the wind isn't blowing there has to be sufficent capacity to supply the demand from England, so the Highlands will see the English border constraint.
More stupidity on a stick from the Net Zero lunatics.....
This is a bit niche but for those who are interested I have just published a piece on some of the deep roots of why We Are Where We Are. Hint: it’s Consumerism, any comments greatly appreciated.
An example of regional nodal pricing is Norway (and Sweden). Norway’s electricity generation is almost exclusively from hydro, so the costs are heavily dominated by the facilities and the poles and wires that deliver to customers. The result is that per kWh charges are very low (often under 1p/kWh, so they can afford EVs and heat pumps), with most of the bill being standing charges to cover the cost of the assets. So long as each region is adequately supplied it has little need for strong transmission links to other regions, except when plant is under maintenance, aside from needing to import mainly from nuclear Sweden in years with poor snowfall/snowmelt in exchange for some cheap export in wet years. Production can vary between ~100-145TWh/a.
However, since the populous NO2 region in the South started connecting more to Europe and the UK the result is that they import shortage prices via the interconnectors. These no longer occur just in years with low precipitation, but any time Dunkelflaute strikes.
https://www.epexspot.com/en/market-results?market_area=&auction=MRC&trading_date=2024-12-01&delivery_date=2024-12-02&underlying_year=&modality=Auction&sub_modality=DayAhead&technology=&data_mode=map&period=&production_period=
The effect of the new German interconnector on Oslo/NO2 prices is very clear, as this chart shows.
https://datawrapper.dwcdn.net/fLVEo/1/
The other regions have no interest in connecting more transmission (who pays for that?) to increase their local prices while perhaps exporting some of their output. Indeed, Norway as a whole has refused to implement a new interconnector to Scotland, and is considering not renewing contracts on interconnectors to Denmark and the Netherlands.
A topical thread from energy data investigator James Twallin highlighting the problem of wind farms located far from the centres of electricity demand: https://x.com/twallin_james/status/1862443490992357872.
James Twallin has done some interesting work, particularly on estimating what wind might have generated if it has curtailed because of negative prices and isn't being paid: I've come across him before. Unfortunately, I can only see the first post in the thread as I am not on X. But it points up the huge levels of curtailment at Seagreen offshore wind farm. The saving grace I suppose is that the average cost of these is only £28/MWh.
Seagreen is nominally on a CFD, but it anticipates not commencing the CFD until the last permitted dates, stretching out to 2028. In the mean time, it gets market prices for its output instead of its currrent CFD strike price of £54.64/MWh, plus curtailment payments. Clearly, it curtails when that is more profitable than producing at market prices.
It is highly illustrative of what will befall the large wind farms further South as capacity increases to create more hours with curtailment required. Those with no protection against negative prices will be first in line to curtail and therefore will dominate curtailment, and as there are more and more of them curtailment will be subject to increased competition eroding revenues. These wind farms could easily get stretched financially. It will be interesting to see the next Seagreen accounts which will cover a period of full operation.
Meanwhile the heavily subsidised wind farms will have no incentive to curtail at all.
As a very minor shareholder in BP, holding on for the dividend and an eventual return to sanity, it is gratifying to note that they have just closed down 18 hydrogen projects: https://www.thecooldown.com/green-business/bp-hydrogen-projects-investment-strategy-slashed/
This goes nicely with a German railway operator withdrawing its recently acquired Hydrogen trains as they are unreliable
https://brusselssignal.eu/2024/10/german-government-threw-e50-million-at-failed-hydrogen-train-fleet/
The fact that all our energy companies, Octopus included, claim their electricity is 100% renewables proves that they are lying grifters.
Our Lab/Con/Lib/SNP Uniparty politicians used to go on about how vital it was for us to “tackle climate change”. They never say it nowadays because the official aim now is simply to reduce (to net zero) the UK’s share of global greenhouse gas emissions, less than a paltry 1% of the total. I’ve seen it baldly stated on a gov.uk web page but unfortunately, I can’t find it again.
This is how they justify charging ahead with Net Zero unilaterally when it is obvious that most of the rest of the world will never follow suit, rendering it a totally pointless endeavour even if the climate pseudo-science they use to justify Net Zero were valid, which it isn’t.
The Lab/Con/Lib/SNP Uniparty is intent on wrecking the country at the bidding of their globalist overlords and it’s not going to have the slightest impact on the global climate: https://metatron.substack.com/p/debunking-the-climate-change-hoax.
There are times in the year when a claim such as that by Octopus could be true, but conversely, given the customer numbers, low renewables output, the typical domestic consumption values determined by OFGEM and the actual system demand, there are many, many occasions where it is impossible to satisfy the customer numbers they have with renewables to anything more than single digit watts, which is a very tiny and insignificant proportion of the customers actual demand.
But get them or OFGEM to admit they are talking bollocks isn’t going to happen. For instance it can be repeatedly observed that when questioned on precisely these points chatty ‘Greg’ and customer service regularly just go into ‘quiet mode’
Here’s a US senator quizzing a US Energy Secretary: “If we spend $50 trillion on reducing our emissions how much will that reduce global temperatures”. No answer, just stonewalling: https://x.com/Artemisfornow/status/1863168913988600276.
1. The electricity is not free, the cost is paid by someone else, in this case, the consumer.
2. Electrolyzers need to operate at a certain capacity factor to pay back their capital cost and the fixed portion of their operating cost. Although they can be operated as a flexible demand, such operation is only viable if enough surplus renewable power is available to reach the capacity factor for an economic operation. A large electrolyzer, designed to soak up most of the surplus power would not have enough equivalent full capacity operating hours to be viable. A small electrolyzer would not be able to soak up enough of the surplus power. I have shown in a substack article, based on an analysis of UK wind capacity factors, that an electrolyzer can only operate with a 50% capacity factor after surplus renewable energy reaches a 30% curtailment.
https://johnd12343.substack.com/p/the-fantasy-of-free-electricity-from
3. The produced hydrogen needs a user. If that user is a generator providing power in times of a renewables deficit, then the production and use of the hydrogen are totally out of sync, and vast quantities have to be stored. If the user is transportation or steelmaking, the demand is steady and continuous, significant storage is also needed.
4. Above ground storage of hydrogen is very expensive. The only viable storage for the quantities required would be salt caverns. A hydrogen pipeline would be needed from the electrolyzers to the storage caverns, or an electrical transmission line to electrolyzers located at the storage caverns, which of course eliminates the reason for building the electrolyzers near the power source.
5. All of this additional cost (electrolyzers, pipelines, transmission, generators etc) would allow only a small portion of the surplus wind power to be used, with an abysmally low efficiency providing just 1 Kwh of power output for every 3 Kwh of input.
The people suggesting this just haven't thought it through, or perhaps they have thought it through and they are simply part of the vast, subsidy chasing great green grift, and they expect the public to buy into the scheme and keep the grift going.
Excellent analysis
That's a very good analysis, similar to my own.
I looked at surplus duration curves at various levels of wind capacity (they are multiples of the 22GW we had installed when I ran the numbers 4 years ago now). The maximum capacity factor for the first MW of electrolyser is given by the x axis intercept of the duration curve. The intercept on the y axis gives the largest surplus that occurs, and defines the capacity you would need to install to capture all the surplus. Mouseover each curve and read off the maximum installed electrolyser capacity consistent with a given minimum utilisation rate. All production in the triangular area above and to the left of the chosen point must otherwise be curtailed.
https://datawrapper.dwcdn.net/nZM72/1/
I also think you are absolutely right to highlight the issue that the volume of output that has a positive value declines as wind capacity is increased, effectively multiplying the real cost of a marginal wind farm. This chart is one way of looking at it:
https://i0.wp.com/wattsupwiththat.com/wp-content/uploads/2024/09/WInd-Curtailment-vs-capacity-1725664049.9688.png
Thank you, David, for your clear analysis and explanation.
"In the Government’s REMA consultation document, they explain how the negative pricing rule has evolved. In Allocation Rounds 2 and 3, if the day ahead price falls below zero for six or more consecutive hours, no CfD payments are made. This rule was tightened in AR4 and beyond so that no CfD top-up is paid if the day-ahead price goes negative for any day-ahead period.
Of course, it is obvious that wind farms produce most when it is windy. So as wind capacity increases, the market value of most of their production is going to be zero, or less. They need large, flexible sources of demand close by to keep prices above zero. We can see that Jackson’s plea for locational pricing is little more than a way of protecting newer wind farms from zero prices so they can continue to harvest subsidies rather than receive nothing for most of their output."
I *had* heard that Wind producers especially were ultra-keen on building new 'green' hydrogen production as a way of increasing Demand in times of Wind surplus... but I didn't understand their motivation until your post.
As you say, UK energy policy is being run for the benefit of intermittent energy producers, not customers. As I have often said, the moniker "DESNZ" is no longer accurate: it is solely "DNZ".
This is a brave attempt to debunk the utter nonsense that #GrifterGreg and his collaborators come out with David. I have been thinking about an article on locational pricing myself for a while, but it's such a complex heap of 🐎💩 that I just haven't been able to figure out a clear way to explain it to a lay audience.
Of course, there will be frequent occasions in an overbuilt wind scenario when there is a large excess of "free" 🔌 (at marginal cost). It might - in some circumstances & if hydrogen production storage technology were viable & mature - make sense to produce hydrogen with that excess. But that has little or nothing to do with locational pricing per se.
The bottom line is that, of £3.4 Trillion total UK NZ costs, "only" about £350 billion of that is for the transmission grid, and only a tiny fraction of that could be saved by co-siting new industries (hydrogen production, AI centres etc.) alongside offshore wind connections. Maybe 10%. Let's be generous & call it £50 billion, so the cost of NZ drops to a mere £3.35 Trillion.
I have direct experience of this type of favourable treatment for selected industries - specifically, aluminium smelters adjacent to hydro plants in Africa. They ended up taking all the power, at near zero rates, leaving the rest of the country to pay much higher costs and to experience frequent blackouts. The UK might (in earlier, saner, less corrupt times) be able to arrange things slightly better, but the law of unintended consequences still applies, and the road to hell is paved with good intentions as they say.
TLDR: Locational pricing, like everything else to do with Net Zero, is gaslighting lunacy.
Richards Bay and Mozal both depended on South African coal generation up on the veld at mine mouth. There were attempts to link in to Cahora Basso hydro, but that is hardly next door. Neither is Mozambique LNG , if it ever gets going. There were still substantial coal exports from the mines in addition to generation for Joburg/Pretoria etc. Of course, BEE has seen Eskom become corrupt and no longer able to maintain its operations properly or ensure it gets paid for output.
Gateshead have a very efficient gas turbine, but are now also using a mine water bore scheme which uses a heat exchanger, as well as a solar farm. So it’s a combination of sources. Passed the mini power station the other day, it’s in the middle of Gateshead, wonderful initiative... see my essay for a full description
Ive seen the mine water idea a while back and actually that's feels a worthy idea that should be exploited wherever it can although don't know how useful it would be (clearly only in former mining areas). Is there a govt scheme to drive it forward?
This is really interesting. I think the penny is beginning to drop that the massive expansion of the Grid is not the silver bullet we are being told it is.
Why aren’t other options like local generation with combined heat and power plants being explored? Gateshead has a wonderful example of a local area network.
All this new house building could include local generation. Carpeting the country with pylons is not the answer to our energy problems. I’ve written a short piece about some alternatives...
Agree, but I still don’t understand why it’s not compulsory on new builds to include solar and battery.
At bulk, say a 100 unit development the unit cost would be minimal % of the property sale price.
No heavy duty grid connection needed, use local what’s generated locally 🤷♂️
I have a modest solar system, and averaged out over the year I pay nothing for electricity, if the standing charge wasn’t so ridiculous I would be in profit.
Bog standard 3 bed semi in Kent
I do understand. We have a technically illiterate political class, that’s why who wouldn’t know the difference between a transformer and a children’s toy of the same name. And of course the house builders have far too much influence on the political system. We need to start the engineering equivalent of banging dustbin lids on the ground before lights go out…..
So what are you going to run the local CHP on?
So how does locational pricing work when the wind isn't blowing do they get charged more for sending power to them from down South? Anyhow most power is bought on the forward mkt months / years ahead and thats never sold at negative prices. It does go negative on the day ahead mkt but commentators focus on the system price as though that is what we are all paying - it isn't.
The fundamental issue is OFGEMs connect & manage policy has allowed generation, however unreliable, to outrun transmission capacity and create the constraint nonsense we now see. This will be fixed to a degree with the Eastern DC Links which incidentally should have been built years ago but OFGEM would never sanction the expenditure. (Oh and it will reduce occurrences of negative SPs as well). Now OFGEM have flipped the other way and are doubling down on letting the TOs build ahead of planned windmills which may never be built. If your going to go down the route of anymore NZ generation at least do it in a coordinated way so that the transmission capacity is there from day 1 and factored into the cost and deliverability.
Anyhow back to your article im fearful that Millibrain will push this through as it will give him something to hang his hat on about saving consumers money. I'm also now convinced that Reeves isn't stress testing anything out DENZ to see whether it encourages or discourages growth so she wont stand in his way.
This is a good question/comment & it highlights 2 reasons I say "it's such a complex heap of 🐎💩" in my previous comment.
For something like hydrogen production, intermittency wouldn't be a problem (notwithstanding David's comments about storage facilities! ) - as operations could be ramped up & down depending on the availability of wind.
Actually, intermittency is a problem for hydrogen. Electrolysis really needs steady process conditions for maximum efficiency, otherwise the efficiency can be hit quite badly. That is quite aside from the issue of whether utilisation is so low that capital cost escalates alarmingly per unit output. Since demand fluctuates diurnally, surplus hours are more likely to be at night for a few hours.
I am watching to see what happens with the Poshydon project in the Netherlands. It seems that onshore testing has run into snags, as they are now way behind schedule on announcing installation offshore.
But for a 24/365 AI data centre, they'd need an alternative - either backup generation on site, or a grid "backfeed". It might be that existing transmission connections were of sufficient capacity to provide the backfeed, but you'd still then have to cater for potentially excessive transmission losses - and of course for high marginal costs of whatever low-merit-order generation was called upon from the remote location.
Most large data centres make sure they are physically located close to a major dispatchable generator to minimise risks of loss of power supply. Like this
https://www.ans.org/news/article-5842/amazon-buys-nuclearpowered-data-center-from-talen/
They add virtue signalling supply contracts to taste.
Furthermore, as you say, you have forward sales to think about - how does that work in a scenario where a new steel plant, for example, has contracted for the full average output of its local wind farm. When the wind drops, the Supplier (the wind farm) potentially has a massive short position to close, typically by buying from a little-used fossil fuel backup plant at the other end of that transmission backfeed.
Wind farms tend not to take much performance risk. Contracts typically allow them to nominate how much they will supply quote close to actual delivery time, when the weather forecast is much more reliable. Corporate buyers will have a further contract for supply from other sources to cover their full needs. In fact, usually the whole caboodle will be managed by the balancing supplier (e.g. SSE), who may also at least part own the wind farm
"a further contract for supply from other sources".
Indeed. We're saying essentially the same thing: co-siting any energy intensive industry with an intermittent source of supply makes no sense at all, except to the disingenuous climate catastropist cult loonies.
And, of course, the wholesale market is totally rigged in favour of "Renewables".
https://johnsullivan.substack.com/p/uk-energy-consumption-and-electricity
The whole setup would be disastrous, and likely completely unworkable. #GrifterGreg and his collaborators are clueless.
David - I would like add a couple of points based on my experience of REMA and nodal pricing. In principle I am strongly in favour of it but you can never trust DESNZ to do anything competently. That leads to my first point. A couple of years ago I participated in the early online meetings in which the goals for REMA were discussed. The crucial point that came over was that DESNZ was entirely captured by the concerns of renewables lobbyists and related parties. The overwhelming concern was how to make life easier and more profitable for investors in battery systems. The Department's interest in consumer interests was minimal because the staff was preoccupied with responding to lobby groups. This is a classic example of a ministry that is dominated by producer interests.
Second, I have spent a lot of time recently studying the PJM market, which is the largest regional transmission system in the US by population. It uses nodal pricing, which works well. The differences in area prices are relatively small with nodal premia rarely more than 10% of the base energy price. However, there is a crucial difference with the way PJM works and the views espoused by Octopus. In PJM it is supply - not demand - which moves in response to nodal price differences. No-one expects a chemical plant to move from New Jersey or Pittsburgh to Virginia. However, utilities locate and operate their gas plants where they can take best advantage of nodal price differences.
The point here is that renewable producers like Octopus want everyone else to fit in with their convenience and profit. In PJM the utilities and system operator understand perfectly well that most large energy users don't see the choice as being one of moving from NJ or PA to Virginia. If electricity prices are too high where they are now, they will move to the Middle East or Asia. That, of course, is what is happening in the UK but the Department and renewables firms can't admit that. So what you get is the ridiculous idea of moving very expensive and completely uneconomic uses like electrolysis, because, after all, they are heavily subsidised and what difference does a bit more subsidy make. It is all a self-sustaining fiction in which the idea that UK businesses have to compete in the rest of the world is simply ignored.
Gordon, you are quite right that industries are unlikely to relocate, but new industries would be in a position to game the system - & they would, to everyone else's detriment.
See my previous counterpoint about aluminium smelters adjacent to hydro plants in Africa.
Entirely correct but not new. The same has happened for aluminium smelters in the UK and several other countries. Power plants next to coal mines are a variant. There can be a logic in minimising transmission & transport costs but often it is the consequence of credulous behaviour by governments which over-estimate the benefits of some kinds of industrial development. Smelters are a very good example of that.
My experience at the NESO FES25 planning event last week bears this out. Totally captured by producer interests. The consumer voice barely gets a look in.
I agree nodal pricing could work well if supply could respond to price signals. But as you say, what we have is inflexible supply, so nodal pricing can only help those generators harvest more subsidies.
Gordon very interesting insight into the way DENZ operates and so they must be delighted with an eco evangelist like Millibrain turning up to double down. This unfortunately convinces me now that they will bring in REMA.
Separately though i thought there were already indirect incentives on use of system charges such that generation in the SE is charged less now?
Ed Miliband fixed it in the Energy Act 2010 just before the 2010 election. It provides that OFGEM should give priority to green interests which are deemed to be in consumer interest.
Transmission Network Use of System charges are now almost entirely allocated to demand following an OFGEM decision a few years ago (one reason why standing charges have increased so much), so there is no locational incentive any more for generators, beyond where they might stand over being curtailed or dispatched. Alec Salmond did a deal to ensure that Scottish wind was favourably treated long before that.
Oh yes forgot about that stitch up but generators still have to pay c25% of the charges to cover the costs of operating the transmission system. Which as an aside i see are forecast to rise a fair bit next year as NESO have increased the initial allowance for new build further as a result of OFGEM sudden found philanthropy towards transmission operators
Most of the charges they pay relate to offshore OFTOs (about £700m this year) and connection charges.
The detail: https://www.neso.energy/document/301741/download
Thank you David! The contrasting conclusions of Octopus and SSE brought to mind George Canning's "I can prove anything by statistics except the truth". I guess a lot of reports are commissioned to bolster the desired outcome.
My simple mind struggles with many of the concepts around electricity supply. I thought that the very purpose of a grid was to convey electrical energy from source to use - hence the 'National' In National Grid.
I also have a word for something that needs to be provided in massive excess, requiring backup to account for its vagaries - waste.
Running two sets of generation is wasteful and certainly wont deliver lower cost but it is a necessary evil if we need to lower our carbon emissions and still keep the lights on. Politicians should be honest about this and Millibrain had an opportunity to recalibrate the response such that at least real UK jobs were created in delivering it not supporting jobs in Europe and China.
I think the real take away for me is that Gateshead are taking control of their own energy needs and won’t be held to ransom by giant corporations. The islanders of Eigg who run their u in en micro grid are taking the same approach. IMO we need to get away from the bigger is better mindset, there’s a point at which the ‘economies of scale’ mean handing over our fate to giant corporations...
The reason we ended up with the grid was to eliminate all the backup plants that each local undertaking had to have to cover peaks and plant outages. Invariable those plants were highly inefficient and polluting compared to best plant in the day so this risks going back to the same situation.
But we've moved on since, new plant doesn't have to be polluting, nor inefficient. It might have been good in the 1950s, but more of the same doesn't necessarily make it better. What I'm suggesting is to take a step back and look at the overall energy picture as Gateshead did.
Nuclear?
I have been trying to explain to friends for years that all these “innovations” are the result of trying to fix a system that is fundamentally broken by NetZero policy. It’s incredible, even to me, how far this “they” want this to go. Someone told me the other day that we’ll soon be powering the grid from EVs. I just don’t have the patience any more to argue against this level of stupidity / ignorance / gullibility.
I was thinking the same thing reading this. Volatility has been created for profit much like how after 2008 oil markets saw volatility in futures orders of magnitude larger than normal because banks were speculating trying to recoup losses from the MBS crisis.
Here we have an engineered system with a volatile input that propagates and even amplifies that volatility through the price market. Completely artificial and based on ideology as much as grift.
The solution to price volatility is building redundancy and a much more stable energy network. But that means slandering the God of Climate Change.
Agreed, but life is short and picking your battles is key to maintaining sanity!
Steve i empathise with you and i find myself in the same situation but we have to keep at it otherwise the eco evangelists have won out.