An interesting article below from the BBC discussing the ongoing issue with constraints, and the overlap to zonal pricing. It is a hot debate, with a certain amount of heat on both sides, and as is often the case on contentious issues, the important detail often gets lost in the soundbites. These issues are a mix of technical, political and commercial issues – so it is often difficult to get to a clear answer. I have tired to pull together some of the real issues in the debate in a constructive way – which I hope is helpful to readers.
BBC – Energy Curtailment Costs
Putting aside renewable vs conventional generation for a moment, and some of the more granular issues like battery skips rates – let’s just consider the basics of a constrain and why does it matter? Going back to basics, constraints come in different forms and for different reasons – in general terms there are two types of constrains in the UK network.
Local constraints, these are caused by network congestion or lack of capacity in a network area, and are clearly understood by the developer and local DNO / TSO. Constraints are managed through an Active Network Management (ANM) system, which prioritizes generation based on availability network priority and usually some variation of Last In First Out (LIFO) priority stack. These constraint costs are absorbed by the develop and generation operator, and usually not too contentious. The developer has an incentive to understand these constraints in detail, and assess any potential loss of revenue to their proposed development.
National constraints, these are more varied, and in some ways similar to local constraints, but considered at a national level. The reasons for constrains are much more complex than the local constraints, and they are imposed by a combination of factors, such as generation location, network capacity, stability limits, inertia limits and other NESO operational limits. Some simple examples of these, are the need for NESO to maintain a certain amount of inertia on the system and the well-known Scotland-England interconnector limits. The interesting thing with National Constrains is that NESO has to pay the generator to constrain the production. So the cost and risk is born by NESO, and thus ultimately the consumer.
The article has a reasonably balanced view of the advantages and disadvantages of regional pricing. However, it fails to mention two important issues surrounding this topic:
1) Reducing prices in many areas won’t lead to increased demand, because they are areas with either sparse population or otherwise unsuited to hi-tech consumers (such as data centres) being set up, new developments typically need multiple incentives to build in an area, and often face local issues such as planning, lack of transport, lack of high speed fibre. The issue of inadequate transmission capacity will still remain. Local and regional councils could perhaps overcome these issues, but they are notoriously difficult logistical problems to manage.
2) Removing transmission constraints cost money and takes time, this requires either new transmissions lines or cables to be constructed or new HVDC links. Building new transmission capacity is expensive, time consuming and complex, and often faces significant local objections and planning problems. Creation of new transmission capacity obviously has to be paid for, and this is ultimately passed on to consumers.
So why the controversy? Part of the problem is that there are competing demands from different parts of the government. There is a desire to build more renewable energy capacity within the UK, and there are limited places where it can be built. Wind particularly favors Scotland, where there is already an abundance of wind power, which is limited on how much can be transferred to the major load centers in the UK. Many developers will continue to build new wind farms in Scotland, as the financial risk does not directly sit with the developer and instead sits with NESO – in simple terms the developer will be paid either if they generate or if they do not because they are curtailed.
So long as the current system of constraint payments exists, this is largely a one-way bet. Because it will take many years, to construct sufficient transmission capacity to eliminate the constraint payments. As we aim for CP2030, there is a fundamental dilemma, building more new clean power sources is essential, but if they are not coupled with suitable infrastructure and transmission capacity, they will be of little use as they cannot actually generate fully in a manner that is useful.
So what to do?
If we want to reduce electricity costs, then it is clear that the forecast £8bn in constraint payments needs to be addressed. A few ideas are being considered in this area. NESO are beginning to look at this through additional of zonal elements in the Contract for Difference (CfD), new capacity is being installed in the form of new HVDC links between Scotland and England. These approaches will manage some of the issues but not all, and fails to address the fundamental issue of curtailment risk sitting with NESO (and the consumers) rather than with the developers.
Instead, why not move the cost of constraints borne by NESO, onto the developers? This would align with the principle of local constrains that the DNOs impose on developers within the UK GB system generally. It should be realized however that national constrains and local constraints are different; as noted earlier, local constrains are relatively simple to assess and manage on local power flows, whilst national constraints depend on the whole network load & generation balance and interrelate with the various trading platforms.
That said, the approach is conceptually easy – don’t pay constraint payments to those who choose to locate generation in areas where there is high probability of being constrained off! Developers have both the tools and expertise to assess the suitability of any potential location for revenue, and would this be suitably incentivized, to manage the financial risk.
The approach would need some consideration, to avoid the law of unintended consequences. A key challenge here would be that this approach would potentially slow down renewable developments, as they would face further financial pressures, this would slow down the CP2030 goals, and further uncertainty into an already stressed market. However, to counter this we are already midway through 2025, and many of the proposed developments will take many years to come on line, whilst the high cost of curtailment will still be borne by consumers.
Perhaps a short terms solution is that payments for curtailment and placed into a ring-fenced fund, that has the sole purpose of which is to fund transmission capacity enhancements that reduce or eliminate such constraints. Over time, one then has a mechanism for funding transmission capacity construction, without placing the burden on the consumer, which then reduces the incidence of constraints, allowing generation to actually generate.
*****
BBC Article: Britain’s energy bills problem – and why firms are paid huge sums for unwanted power – Justin Rowlatt 9 June.
Points to note:
In one recent half-hour period a constraint resulted in £115k being paid out by NESO because of anetwork constraint resulting in one wind farm being constrained off.
Another wind farm received £65m in constraint payments for the same reason (inadequate transmission capacity) in 2024.
Such constraints have cost NESO over £500m in 2025 so far, and forecast to cost £8bn by 2030 (estimate by NESO).
And, of course, the consumer ultimately pays these costs.
The article has a reasonably balanced view of the advantages and disadvantages of regional pricing. However, it fails to mention two issues surrounding this topic:
- Reducing prices in many areas won’t lead to increased demand, because they are areas with either sparse population or otherwise unsuited to hi-tech consumers (such as data centres) being set up. The issue of inadequate transmission capacity will still remain.
- Removing transmission constraints cost money and takes time. No mention of where the money will cone from (hint- it will be consumers, ultimately) or how long it will take.
Arguably more seriously, the article quotes the chair of the UK arm of a major European power generator as being worried that such pricing will make revenues more uncertain, and hence risking future investment (i.e. jeopardizing the net zero goal).
Really? Such comments reveal much about what is actually going on. It’s not about meeting network demand by use of green energy. It’s about making money – actually using the generation asset to generate isn’t on the agenda when one gets paid regardless.
But consider. This company, and others whose business is generating energy (green or otherwise) are not technically ignorant. In fact, legally, they are ‘informed clients’ – they know full well when locating a large windfarm in, say the far north of Scotland, that they will be paid for generating, and also paid for not generating. And, so long as the current system of constraint payments exists, this is largely a one-way bet. Because it will take many years, to construct sufficient transmission capacity to eliminate the constraint payments. And companies in looking to install wind farms (say, it could be other forms of generation) are sufficiently savvy, technically (or ought to be) to know this. They don’t mention this, because to do so would be to admit that they know such investments are, largely, a one-way bet.
Whatever happened to the concept of privatization being about risk-taking? The only winners from the current system are the companies who finance these developments.
If one really wants to reduce electricity costs, then it is clear that the forecast £8bn in constraint payments needs to be addressed. And the method to do so is quite simple: don’t pay constraint payments to those who choose to locate generation in areas where there is high probability of being constrained off. But instead, the cost of constraints should be placed by NESO into ring-fenced funds, the sole purpose of which is to fund transmission capacity enhancements that reduce or eliminate such constraints. Over time, one then has a mechanism for funding transmission capacity construction, which then reduces the incidence of constraints, allowing generation to actually generate (which, remember is its’ real purpose). And so constraint costs reduce, that impacts prices to consumers. It will take time, as the lead time for transmission capacity can be years. But doing nothing to the current system is not an option, because the system is encouraging gaming of it by generators to locate where the y know they will get paid irrespective of generating or not – which is hardly the best use of available finance from a consumer perspective.
For those who want a bit more depth, there is a more detailed overview of NESOs current proposals for market reform.
https://www.neso.energy/industry-information/balancing-services/constraints-collaboration-project