Learnings

Outcomes

1. Market-Based Connections Product Overview: An overview of the Market-Based Connection Product and how it compares to other connections products.

Key features of the MBC product:

• A Market-Based Connection (MBC) product should enable an earlier connection.
  
  
• The MBC product is additive to the existing suite of connection products and is suitable for sites that:
  • require a higher Maximum Import Capacity (MIC)
  • require a higher level of MIC sooner than can be provided by a Ramped Connection.
  • cannot accommodate the immediate reduction of demand required by a Flexible Connection. 
• The MBC product allows a new site to connect with a level of firm capacity and the ability to increase its electricity demand above this level, provided it has a bilateral trade with an existing demand site that will reduce its baselined electricity demand (kW) between agreed times. 

The MBC product provides a site with: 

a. Firm capacity: this enables normal site operation for most of the year but cannot meet the additional operational capacity needs during network peak times. 
b. MBC capacity: This can meet the additional operational capacity needs during network peak times. It can only be used if there is an existing bilateral trade with another demand site in the same network area that reduces its demand by the same amount and at the same time. 

2. Commercial Design, Market Design and Gaming Risks: Market and trial design elements for the traded product guided by past projects and internal stakeholder feedback.

Purpose of the Commercial Design 

The commercial design section outlines how the MBC product is structured to be financially viable and attractive for demand customers while ensuring network stability.

Key Elements of the Commercial Design 

1. Addressing Connection Constraints 

• MBC is an "additive" product, meaning it does not replace existing connection products but offers an alternative for demand sites awaiting infrastructure upgrades. 
• Focuses on new demand sites that need higher MIC or faster access to capacity than traditional connections allow. 
• Preserves queue position for a firm connection once upgrades are complete.

2. MBC Product Lifecycle 

• Pre-application: Sites express interest and assess suitability.
• Trading MBC capacity: Sites participate in bilateral trades to secure additional capacity.
• Migration to a standard firm connection: Once infrastructure upgrades are completed, sites transition to a permanent connection.

3. Nodal Capacity & Risk Management 

• SSEN sets a Nodal Capacity Limit to ensure safe operation and prevent overloading.
• Factors considered when setting limits:
  • Existing network headroom.
  • Outage impacts.
  • Network congestion risks. 
• Applications for MBC are ranked based on:
  • Queue position.
  • Readiness to connect.
  • Level of MBC capacity requested vs. total capacity available. 
• Sites with the best ranking receive MBC agreements first.

4. Trading and Market Design 

• Sites must trade capacity to access MBC
• Trading rules:
  • Buyers and sellers agree on turn-down periods.
  • Pre-agreed network limits apply.
  • Trading must happen in advance to ensure stability. 

5. Cost Structure & Customer Charges 

• DUoS (Distribution Use of System) Charges:
  • Customers must pay standard DUoS charges on their total MIC, even if they trade MBC capacity.
  • This could make the product less attractive if market liquidity is low
  • Potential risk: DUoS charges could impact profitability for buyers relying on MBC trades. 
• Cost Recovery Model for Market Operator:
  • Several pricing models were considered, with a fixed fee per trade being the preferred option to minimize barriers to entry. 

6. Potential Risks & Mitigations 

• Market Liquidity Risk: If too few buyers or sellers participate, trading may not be viable. 
  
  • Mitigation: Stakeholder engagement to ensure interest and participation. 
• Gaming Risks: Potential for price manipulation or artificial constraints. 
  
  • Mitigation: Transparent market rules and baseline monitoring. 

The commercial design ensures the MBC product is financially viable, aligns with SSEN’s operations, and provides a fair and structured way for demand sites to connect earlier. However, customer costs, market liquidity, and regulatory considerations remain key challenges for the product’s success. 

Purpose of Market Design 

The market design defines how the MBC product operates, including trading mechanisms, participant rules, and trial structure. It ensures that buyers and sellers can trade demand turn-down effectively, allowing new sites to access capacity while maintaining network stability. 

Key Elements of the Market Design 

1. Market Objectives 

• Primary Goal: Enable cost-effective, peer to peer trading of electricity capacity.
• Secondary Goals:
  • Ease of operation – Simple processes for buyers and sellers.
  • Transparency – Visibility of trades and outcomes.
  • Fairness & neutrality – No discrimination in market access.
  • Investment potential – Encourages long-term participation. 

2. Trading Mechanism 

• Buyers need additional import capacity.
• Sellers offer to reduce their demand in exchange for payments.
• Trade Matching:
  • Day-ahead gate closure: Buyers submit bids, sellers submit offers.
  • Batch auction clearing: Trades are matched based on price priority (cheapest offers are matched first).
  • Nodal capacity limits set by SSEN determine how much capacity can be traded in each area. 

3. Market Participation & Rules 

• Who can participate?
  • Buyers: Existing/new network customers who need more capacity.
  • Sellers: Existing customers who can turn down demand on short notice.
• Eligibility Criteria:
  • Must be in SSEN-defined geospatial areas.
  • Must have half-hourly metering and meet technical standards.
  • Buyers must sign an MBC agreement. 

4. Pricing & Trade Execution 

• Two-Sided Pricing Model:
  • Buyers bid a maximum price they are willing to pay.
  • Sellers offer a minimum price they are willing to accept.
  • Pay-as-clear batch auctions set final trade prices. 

5. Market Operation & Settlement 

• Market Operator (MO) manages trading, verification, and settlement. 
• Dispatch & Delivery Process:
  • Buyers and sellers receive dispatch notifications.
  • Metering data is verified post-delivery to confirm compliance.
• Settlement:
  • Payments are processed based on successful trades.
  • Baseline monitoring ensures sellers reduce demand as agreed.

6. Risk Management & Stakeholder Feedback 

• Key Risks & Mitigations:
  • Liquidity risk: Insufficient buyers/sellers may impact market function.
• Solution: Engage more participants and simplify entry requirements.
  • Gaming risks: Sellers withholding capacity or manipulating demand.
• Solution: Baseline verification and penalty structures. 
• Stakeholder Feedback: 
  
  • Participants support the concept, but liquidity concerns remain. 
  • API-based integration requested for automated trading. 

The MBC market is designed to facilitate peer to peer capacity trading, helping sites connect sooner.  

What is Gaming? 

Gaming occurs when participants exploit weaknesses in market design or rules to gain an unfair advantage, potentially harming other market users and disrupting fair trading. 

Identified Gaming Risks (Ranked by Severity & Likelihood) 

1. Monopoly Pricing (Highest risk) 

• Risk: In areas with few sellers, one entity could inflate prices
• Impact: Buyers may struggle to secure affordable capacity
• Mitigation: Encouraging more participants, setting price caps, and monitoring trade patterns. 

2. Tacit Collusion 

• Risk: Multiple sellers could coordinate to keep prices high.
• Impact: Artificially high prices reduce market efficiency.
• Mitigation: Transparency measures and automated monitoring of trade behaviours. 

3. Withholding Capacity 

• Risk: A seller may refuse to offer demand turn-down, creating artificial scarcity to drive up prices.
• Impact: Fewer trades, higher costs, and reduced network flexibility.
• Mitigation: Minimum participation requirements and seller performance tracking. 

4. Baseline Manipulation 

• Risk: Sellers could artificially inflate their baseline demand before trading, making it appear that they are offering larger reductions than they actually are.
• Impact: False savings, inefficient trading, and higher costs for buyers.
• Mitigation: Strict metering & verification, real-time monitoring, and penalties for discrepancies. 

5. Regulatory Arbitrage 

• Risk: Participants might exploit differences in regulations across zones to gain an unfair advantage.
• Impact: Unintended market distortions and regulatory loopholes.
• Mitigation: Standardized rules across regions and periodic rule reviews. 

6. Information Asymmetry 

• Risk: Some participants may have access to insider information, giving them an unfair advantage in pricing or trade timing.
• Impact: Unfair competition and reduced trust in the market.
• Mitigation: Ensuring equal access to market data and transparent trade reporting. 

7. Explicit Collusion (Lowest risk) 

• Risk: Buyers and sellers secretly coordinate to manipulate prices or trade outcomes.
• Impact: Severe distortion of market fairness.
• Mitigation: Strict penalties, monitoring, and market oversight. 

Key Takeaways 

• Monopoly pricing and withholding capacity are the biggest threats. 
• Market monitoring, transparency, and participation rules can mitigate risks. 
  
  

3. Stakeholder Engagement: Stakeholders involved in the project included buyers & sellers as well as SSEN internal stakeholders. Feedback used to guide the MBC and the traded product design. 

Purpose of Stakeholder Engagement 

This section details how SSEN engaged with stakeholders (buyers, sellers, and industry participants) to gather feedback on the MBC product, market design, and trial structure. It highlights key insights, concerns, and the development of Heads of Terms (HoTs) for participation. 

Key Stakeholder Engagement Activities 

1. External Stakeholder Workshops 

• Two initial workshops:
  • Identified seven potential trial participants and two observers.
  • Confirmed high industry interest in the MBC product.
  • Participants agreed the market would help them connect faster.
  • Key concern: Market liquidity (enough buyers & sellers to make trades viable).
• Follow-up workshop:
  • Gathered feedback on commercial, market, and trial design.
  • Explored ways to simplify contracts to increase seller participation.
  • Some interested parties lacked assets in the constraint area, limiting trial participation. 
• Final workshop:
  • Presented refinements to the MBC product.
  • Discussed long-term business-as-usual (BaU) implementation. 

2. Internal Stakeholder Engagement (SSEN Teams) 

• Four internal workshops with SSEN personnel.
• Topics covered:
  • Commercial design refinements.
  • Market and trial design feedback.
  • Regulatory and operational considerations.
• Two Steering Committee meetings:
  • Provided final approvals for market & trial approach.
  • Ensured alignment with SSEN’s long-term strategy. 

Key Stakeholder Insights 

• Market Demand: Broad agreement that faster connections are needed.
• Liquidity Concerns: Buyers worried about finding enough sellers to trade with. 
• Contractual Complexity: Sellers wanted simplified participation terms. 
• Revenue Potential: Some participants needed clearer financial benefits before committing. 

4. Cost Benefit Analysis: Estimate benefits for Buyers and Sellers with illustration to help understand how to price. 

Purpose of the CBA 

The Cost-Benefit Analysis (CBA) assesses whether the Market-Based Connection (MBC) product provides a net benefit by comparing its economic advantages (earlier connections, cost savings, carbon reduction) to its implementation costs. 

Key Benefits of the MBC Product 

1. Faster Connections for Demand Customers 

• Reduces waiting time for new sites from 5+ years to months/years.
• Helps businesses start operations earlier, leading to higher economic productivity. 

2. Financial Benefits

• Producers (businesses waiting for connections) can start earning revenue sooner.
• Consumers gain earlier access to products/services that require electricity. 

3. Carbon Saving Benefits 

• Earlier integration of low-carbon technologies (e.g., EV charging stations, battery storage) can promote additional use of renewable generation when used during off-peak hours or during periods of excess renewable generation. 

Key Costs of the MBC Product 

1. Market & Platform Operation Costs 

• Setting up and maintaining the trading platform.
• Admin costs for managing market transactions & settlement. 

2. Implementation & Administration Costs 

• Developing MBC agreements and ensuring network compliance.
• Regulatory approvals and ongoing market monitoring. 

3. Potential Risks Affecting Costs 

• DUoS Charges: Sites must pay full Distribution Use of System (DUoS) charges even when using MBC, impacting financial feasibility.
• Liquidity Risk: If there aren’t enough buyers and sellers, the market might not function efficiently, reducing its value. 

Producer Benefits & Financial Impact 

The CBA analysed three types of customers: 

1. Generic Industrial & Commercial (I&C) Businesses 

• Would pay more for early connection since electricity is a small part of their costs.
• Benefit: £130 - £1,500 per MW per settlement period (SP) when trading in all SPs.
• Much higher benefit (£4,000 - £59,000 per MW/SP) if trading only during winter peaks. 

2. EV Charging Operators 

• Less financially attractive if required to trade in all SPs.
• More beneficial when trading only in winter peaks due to high daytime demand. 

3. Non-Profit Institutions (Education, Government, Healthcare, etc.) 

• Compared MBC cost vs. battery storage alternative.
• High benefit in winter peak trading scenarios. 

Accelerating Connection Timelines 

• SEPD (Southern Electric Power Distribution) would benefit more than SHEPD (Scottish Hydro Electric Power Distribution) due to greater demand network constraints. 
• The MBC product could bring forward connections by months or even years, depending on:
  • How many customers accept MBC.
  • What percentage of the existing connection queue is “genuine” (not speculative or abandoned projects). 

Key insights 

• The MBC product delivers significant benefits, especially when trading is only required in peak periods. 
• Industrial & commercial customers benefit the most, while EV chargers and non-profits see advantages in specific cases.    

Early Closedown

The project was closed early and did not go through the live trial period as initially planned. Various obstacles existed such as Low TRL, no business appetite for the tool, high risk of allowing the market to facilitate connections in constrained locations, and crucially, the use case for connecting houses was not feasible as market based connection agreement obligations could not be transferred from property developers to domestic consumers, which meant the anticipated benefits described in the Project Eligibility Assessment (PEA) document could not materialise. 

Lessons Learnt

With the benefit of hindsight, we could have closed the project after phase 1. There were many project risks, so we could have spent less focus determining if they could be overcome and focussed more on whether the project could have achieved the benefits by enabling the connection of new housing development at this stage prior to continuing. Another key learning is whether there is a clear route to Business as Usual (BaU). As the project progressed it became evident that the route to BaU posed significant challenges as more problems surfaced through stakeholder engagement activities. More upfront stakeholder engagement to ensure a viable route to BaU existed could have been carried out by the DNO prior to starting the project to ensure internal stakeholders supported the concept with a clear route to business adoption.