Locational pricing could lead to substantial savings on energy bills.
This approach, currently under consideration in the energy sector, involves varying the cost of electricity based on the specific location of consumption, reflecting the actual expenses of delivering power to each supply point or “node” on the grid.
A recent assessment by Ofgem, conducted in collaboration with FTI Consulting and Energy Systems Catapult, has shed light on the potential benefits of implementing locational pricing.
The report suggests that if such a system is adopted, it could result in cost reductions ranging from £28 billion to £51 billion in Britain between 2025 and 2040, particularly in a nodal market design.
In a zonal market design, the savings are estimated to be between £15 billion and £31 billion.
In addition to the economic advantages, the report suggests locational pricing could lead to societal benefits.
The study indicates that between 2025 and 2040, a nodal market design could contribute £13 billion to £24 billion in societal benefits, with a zonal market design potentially offering £6 billion to £15 billion in such benefits.
In a statement, Energy Systems Catapult and FTI Consulting said: “The dual crises of energy and living costs have brought into sharp focus the need to act to bring down consumer bills while simultaneously supporting network infrastructure investments.
“In the most comprehensive study conducted into the benefits of locational pricing, working with FTI Consulting to advise Ofgem, we’ve found that introducing nodal pricing could reduce electricity bills by as much as £51 billion between 2025-2040, equivalent to £120 per household, per year.”
Writing in response to the report’s findings, Rachel Fletcher, Director of Economics and Regulation and Octopus Energy, said: “This detailed analysis from FTI and Energy Systems Catapult shows that we could save many billions a year by replacing the often meaningless average national wholesale price with markets that reflect the different system realities across the country – and the best thing is all households would benefit from it.
“The estimated savings to all customers across Britain in this study are too big for policymakers to ignore.”