The Economics of Electricity Markets

20The Smart Grid and Efficient Pricing of Distribution Networks

Chapter 19 dealt with pricing issues at the transmission network level. Many liberalised wholesale electricity markets use nodal pricing (at least for generators) at the transmission network level. However, even the most advanced markets today do not seek to determine the correct price signals for customers connected to the distribution network. This remains one of the most important areas for further reform.

20.1 Efficient Pricing of Distribution Networks

How can we achieve efficient use of a given set of production and consumption assets connected to a distribution network?

In principle, a distribution network is no different to any other form of network. The question of the efficient use of production, consumption and network assets has been addressed throughout this text. We are now very familiar with the mechanism for achieving efficient use of a given set of assets. As we have seen, this mechanism involves spot prices for electricity, which are differentiated by time and by location – known as nodal prices or locational marginal prices. Efficient pricing of a distribution network requires some form of nodal pricing.

However, although some liberalised electricity markets around the world make use of nodal pricing at the transmission network level, to our knowledge, nodal pricing of the distribution network has not been implemented anywhere to date. Instead, distribution network charges have tended to be highly ...