The Department for Energy Security and Net Zero (DESNZ) in the UK launched the Review of Electricity Market Arrangements (REMA) in April 2022. DESNZ announced a proposal to introduce locational signals in the electricity market in its consultation documents. In March 2024, DESNZ announced it would not introduce Locational Marginal Pricing that could define a separate price for every network node but instead continue to consult on zonal pricing.

As we await DESNZ’s decision on next steps under a new Labour government, Senior Managing Director George Anstey and Consultant Kardin Somme explain what locational pricing is and why DESNZ has been considering it and provide examples for how it would work in practice. The authors also show why many industry participants have vocally opposed the introduction of locational pricing.

The white paper demonstrates how locational pricing could result in more efficient despatch. However, the introduction of locational pricing challenges market participants’ traditional business models, including potentially requiring hedging of the spread between zones and reallocating congestion rents away from generators to consumers.