AFRY study finds that an enhanced national market design offers benefits with limited risk, whereas a zonal market may lead to higher benefits but also significant net overall costs.
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.
