Stylized white industrial skyline with wind turbines, battery blocks and workers against a blue-green gradient, featuring the text "RWE Reflections" and "RWE" on a building.
STA02-rwe-reflections-light

The role of locational charging in a centrally-planned world

A person from the shoulders up with short salt-and-pepper hair wearing a green sweater and a white collared floral shirt against a light background.
TIC02-Tom Steward

Tom Steward, Senior Regulatory Affairs Manager

Executive Summary

  • Central planning is back in vogue – but it shouldn’t replace the market. 

    The National Energy System Operator’s new strategic energy planning architecture – the Strategic Spatial Energy Plan (SSEP), the Central Strategic Network Plan (CSNP) and the Regional Energy Strategic Plans (RESPs) - aims to map out where energy generation and networks should optimally be built. This represents a marked shift away from today’s market-driven approach, where developers choose locations based on resources, grid access and locational charging signals. The article’s core argument is clear: these plans are useful, but should be a guide, not a  precise blueprint.

    The real objective shouldn’t be to deliver ‘the plan' - instead it should be to deliver a least-cost, efficient energy system. And that requires flexibility. The SSEP is a model, not reality. Like any model, it will inevitably be wrong in places and should inform, not dictate, investment decisions. An over-reliance on central forecasts in effect swaps the combined wisdom of all the  actors in the market for that of the NESO modelling team - risking locking in inefficiencies and failing to adapt to real-world developments. 

    This is where cost-reflective locational charging (or Transmission Network Use of System (TNUoS)) matters. 

    By signaling the system costs of locating in different regions, locational charging plays a critical complementary role: 

    • Ensures that system cost (and so consumers’ bills) are kept as low as possible 
    • Guides investment towards best-value locations (balancing the benefit of high wind resource in some areas with the additional required network build)  
    • Minimises unnecessary (and expensive) network expansion 
    • Helps manage sequencing of investment over time – it’s not just about where things are built, but when they are built 

    Without these locational signals, the system could still reach a similar end point, but through a more expensive and inefficient route, with higher bills for consumers. 

    Crucially, central planning and locational signals should work together, not replace one another. While the SSEP sets the boundaries; the market brings cost discipline and optimises within them. 

    Remove locational charging, and you lose the ability to course-correct. Keep it, and you get a system that is not just planned, but efficient, adaptable and affordable.

Deep Dive: Balancing Strategic Planning and Market Forces

  • Central planning of the energy system is back in vogue – the state-owned National Energy System Operator (NESO) is undertaking development of three new initiatives - the Strategic Spatial Energy Plan, the Centralised Strategic Network Plan and Regional Energy Strategic Plans - which all have two words in common - Strategic Plan.

    The Strategic Spatial Energy Plan (SSEP) will be a government-approved blueprint setting out the ‘optimal’ locations of generation and storage of electricity and hydrogen on the path to 2050.

    The Centralised Strategic Network Plan (CSNP) is the network plan supporting delivery of the SSEP, seeking to optimise timing and delivery of the onshore and offshore electricity, gas and hydrogen transmission networks.

    The Regional Energy Strategic Plans (RESP) are 11 area plans designed to ensure the distribution network is developed appropriately for both the generation (based on the SSEP) and demand (based on input from local stakeholders) of the future.

    Together, these Strategic Plans are intended to determine where it is ‘optimal’ for different forms of generation to be located, and what this means for network development. 

    This is a marked shift from today where each developer makes a free choice over the location of their projects, responding to availability of natural resources, grid availability, and (crucially) transmission network charges (TNUoS1) which send a price signal to reflect the relative cost to the system of locating in one place or another.

    With increasingly detailed and complex planning being carried out centrally – do we still really need locational market signals such as TNUoS, or can the State do it all? This is the question which implicitly lies at the heart of the Government’s recent Reformed National Pricing Delivery Plan – and something this blog sets out to answer.

    1 Transmission Network Use of System

  • The first and most important question: ‘What are we trying to achieve?’

    Worryingly, I hear industry participants and policymakers increasingly asking “How do we deliver NESO’s Strategic Spatial Energy Plan?”, rather than “How do we deliver a least cost energy system?’ (acknowledging the need for energy security, decarbonisation, public acceptability etc.).

    Seeking to deliver ‘the plan’ is like trying to use a printed weather forecast and a chart to navigate across an ocean. They are useful - helping you to prepare for and understand the possible conditions ahead - but they are not the ocean itself. If you sail with your eyes fixed on the papers in front of you, you risk steering straight into storms that were never predicted. A wise captain constantly adjusts course based on real time conditions - wind, tides, currents - to reach the destination as efficiently as possible, whilst looking after the security of the crew.

    We would do well to remember the prize-winning statistician, George Box, who said “All models are wrong, but some are useful”. The SSEP has the potential to be useful in system planning, but when we start mistaking the model for a perfect view of future reality, we risk steering into stormy seas.

    Whatever the post 2030 policy framework looks like – it shouldn’t be designed to blindly deliver the plan, but to navigate toward the least cost energy system, using the plan as guidance, not gospel.

  • The SSEP intends to model the ‘optimal’ location for electricity generation and storage across GB, based on resource availability, environmental impact, impact on network cost, etc. The output will be regional, and give ranges for each technology (e.g. in 2035, optimum could be 6-10GW of onshore wind in North Scotland, and 4-7GW of Solar in South West England ). It is expected that these figures will be used to populate the post-2030 connection queue, seeking to avoid significant over-supply of specific types of generation in particular regions.

    2 These figures are only to demonstrate the argument and should not be considered a forecast/proposal.

    The role of attrition

    Experienced project developers will tell you – not every project that begins makes it to completion. Some sites assessed for wind or solar schemes are ultimately deemed unviable for a range of reasons, including planning refusals, connection issues or financial limitations. Naturally, more projects drop out in the early stages of development than in the later phases, but even a few projects that have secured a CfD have now not progressed to delivery. As a result, the capacity that enters the queue is always greater than the capacity that reaches commercial operation. This is something we need to be mindful of when turning the output of the SSEP into an input for the connection queue.

    This prompts the first crucial decision: With a range of 6-10GW of onshore wind in North Scotland – how much should you enter into the connection queue to secure capacity in that range - 6GW, 10GW or more?

    Attrition means not all projects will reach completion, so contingency needs to be built into the process. If the target is the midpoint of a 6-10GW range, allowing only 8GW into the connection queue virtually guarantees falling short – even of 8GW. The starting point must therefore exceed the desired end point - a range with built in contingency capacity is required to account for uncertain attrition rates. Naturally over-accounting for attrition can however result in over-shooting the intended capacity range.

    It is hard to determine the “right” attrition level,  particularly without the final SSEP output. However, with around 63% of projects being abandoned, refused, withdrawn, or ultimately expired (Cornwall Insight 2023),  aiming for well above the top end of the SSEP range could still yield capacities well within or even below the ‘ideal’ capacity as set out in the SSEP. This approach helps accommodate attrition and maintain competitive pressure between projects (more on this in a moment).

    The SSEP will also be useful for forming an input to the Centralised Strategic Network Plan and the Regional Energy System Plans – both of which will determine network build. These too are critical to the delivery of the future energy system, but less central to the discussion of locational signals, so we will not discuss further here.

    Finally, a real strength of the SSEP will be in its iterative nature.  If actual generation deployment in certain region differs from expectations, future iterations can adjust – scaling capacity of a particular technology up or down to steer outcomes back towards the optimal pathway. This flexibility allows Ofgem, NESO, and DESNZ to be ambitious about levels of generation and network delivery in the early years, safe in the knowledge that any over-shoot can be corrected later. While it may be tempting to make the same argument for lowering initial ambitions, experience – such as the slow growth of onshore wind in England – show that constraining deployment can be difficult to reverse once momentum is lost.

  • Having worked out ranges for the optimal amount of generation in each region, translated this into proceedable connection offers, with confirmed connection dates and points, and set the CfD caps to ensure strong competition – it’s time to run the auction.

    Below are two possible futures – one, where bidding is carried out as today, with projects exposed to cost-reflective locational charges (TNUoS) reflecting the underlying value of the network . The other, where generators are no longer exposed to locational charges – with policymakers believing that the SSEP has already adequately optimised the location of projects.

    3 In DESNZ’s recent Reformed National Pricing Delivery Plan consultation, a number of options were set out – this is most closely aligned with ‘Option 3’

    Teal infographic shows two side-by-side panels with UK maps dotted by colorful location pins, titled "The role of locational charging in a centrally-planned world".

    These diagrams are purely illustrative, and not intended to reflect actual site locations or implications of sea bed depth, but demonstrate how sequencing can significantly affect network development. Even if at the end of this process the same projects and network were ultimately delivered, the order in which they are built still matters. The pathway with locational charging shows a CfD auction process that always chooses the lowest cost (or highest system value) projects of those that are available, and builds them first – this keeps bills as low as possible every step of the way.  (It is worth noting that in reality, locational signals shape decisions even before bidding by guiding where developers pursue projects. High charges typically deter investment unless offset by strong advantages, such as exceptional wind resources).

    By contrast, the pathway without locational signals doesn’t do this, choosing instead to build a mix of higher cost projects first – which will ultimately result in higher consumer bills.  The example in the diagram reflects a world where the SSEP is not unduly prescriptive, but the essence holds true even in a more prescriptive SSEP – that without locational signals, the system would steer towards maximum possible deployment in northerly zones ahead of those further south which require less grid build. With locational signals – consumer value is maximised.  Although higher load factors from Scottish Projects would have a downward pressure on wholesale prices, this needs to be put in the context of additional network costs. The wholesale price benefit of locating in Scotland relative to England is significantly outweighed by the transmission costs required to connect such projects. The most recent sub-sea HVDC reinforcements approved by Ofgem – Eastern Green Links 1 and 2, two 2GW sub-sea cables connecting Scotland and eastern England - have estimated costs of £2bn and £3.5bn respectively (in 2018/19 prices). If developers are not sufficiently exposed to locational signals, network costs – already at unprecedented levels in consumer bills – are likely to continue rising.  While some generators highlight TNUoS costs as being excessive, the majority of transmission costs are paid by consumers. Excluding offshore connection costs (which are paid by developers), the latest NESO forecast indicates that consumers are expected to fund between 85% and 95% of the remaining transmission costs over the next five year. 

    In future CfD rounds, many of the same projects may still go ahead as they would have been under a non-locational system. However, locational charges help ensure the lowest-cost projects are built first, with higher -cost projects only being taken forward as demand grows. By delaying these more expensive options, we also allow the cost of technologies to continue to fall – hopefully making them cheaper to deliver in the future.

    Furthermore, the CSNP will take the SSEP as an input to inform network plans. Although the world without locational charges would still deliver an energy system within the bounds of the SSEP, as shown above, it is potentially a very different world to one with cost-reflective locational signals. The CSNP must take the SSEP modelling one step further, and include consideration of likely CfD outcomes, given the commercial realities facing generators.

  • The above assumes that the SSEP is a well-designed, perfect foresight, reflection of an optimised energy system – but what if it’s not? This is the first time something of this scale and significance has been attempted in the UK, and the stakes are high. If the modelling is wrong, which is almost a certainty given the difficulty of forecasting the future, then the impact of those shortcomings will be significantly exacerbated if there is no space for market-forces to course-correct.  The SSEP and the connection queue together set boundaries for the possible projects that could win a CfD . Cost-reflective locational signals  then allow market forces to optimise within those boundaries – to significant effect, as shown above. Although locational signals are clearly important in a world where the SSEP is an accurate reflection of all the pressures facing the energy system, they are arguably even more important when the SSEP has major shortcomings. If the SSEP is steering the energy system towards a far from optimal outcome, enabling market forces to guide it back towards a least-cost pathway is not just beneficial, but fundamental to protecting consumers, and keeping bills low.

    Some industry participants have suggested that locational signals could be confined to optimising within an SSEP zone – this severely limits the value that locational signals can bring - preventing optimisation between SSEP zones (e.g. supporting deployment of more Scottish wind and less English solar). The big pieces of high-cost infrastructure span across multiple zonal boundaries, and it is these we should be seeking to minimise.

    There’s a great deal of discussion about the future of locational signals, and their role in the GB energy system, with both OFGEM and DESNZ dedicating a lot of resource to this question. There are many, and diverse, proposals on the table. The above pathways show the very different outcomes that can flow from a choice around locational charge design. It’s essential therefore that any future charging framework is reviewed in this way – ensuring that it not only makes logical sense in a single year, but that across multiple CfD rounds and iterations of the SSEP, CSNP and RESP, the framework steers the energy system towards a low-cost, high-value future.

    4 Cost-reflectivity' is important – if locational signals under-value the network, the system will steer towards a future requiring more network than is optimal. Conversely, if locational signals under-value the network, then the system will steer generators away from where would have been optimal – meaning we’re missing out on higher load-factor locations. Either eventuality is bad for bills.

So where does that leave us?

With the ballooning connection queue, and huge delays facing new users wishing to connect to the network, something had to change - the SSEP is clearly part of that ‘something’. It was originally conceived of in the Winser Review as a mechanism to inform network development. Indeed, it has the potential to be very useful for achieving that – and hopefully helping to unlock timely network development. However, like the connection queue, the scope of SSEP is now at risk of expanding – to the point where we have swapped the knowledge of the thousands of actors active in the market, for the knowledge inputted to a model by a small team within NESO. The advantage of using a market to determine the future is that the views of hundreds of market participants are used rather than one view – the “wisdom of the crowd” is proven to be vastly superior for novel, complex problems (which arguably electrification is!) due to diversity of views, elimination of bias, higher creativity and elimination of blind spots. We must take the best of both – strategic planning, optimised by the market. 

Is the current TNUoS framework perfectly fit for the future? No – there are lots of technical details, hidden in the minutia of the model, that do need updating  However, does it make sense to continue incentivising generators to locate as close to demand as they can, and avoid the need for yet more hugely expensive pieces of network infrastructure – absolutely. 

The alternative is to move away from economic discipline and risk higher bills, growing public concern, and a gradual decline in support for renewables. The sector has clear responsibility to deliver affordable energy and maintain security, but continued public backing cannot be taken for granted. If costs are not carefully managed, there is a risk that this mandate falls away – taking our future energy security with it.

5 Not to mention the need for allowing generators the option to fix their TNUoS charges into the future – something we are advocating for in our code change proposal CMP442

You might also be interested in

The changing role of gas in the UK’s power mix

From baseload to flexibility: how gas-fired generation is evolving to safeguard system security in a renewables-led UK power mix

Read more

A call for strategic renewables investment and policy realignment

RWE outlines why we need to change and how, if we’re to secure a bumper yield of offshore wind in AR6 and maximum “bang for your buck” for consumers.

Read more

Why supporting the Armed Forces Community goes beyond award successes for RWE

Marcus Peters shares his thoughts on why RWE’s supportive network and policies make the employer an obvious choice for those leaving service.

Read more