Network Economics
Locational coordination, congestion management and network value.
Overview
The electricity network is more than a collection of cables, transformers and substations.
It is a shared economic asset that enables electricity to flow between generators, storage resources and consumers.
Its finite capacity determines where electricity can be transported, where new resources can connect and how reliably electricity can be delivered.
The purpose of the Network Economics layer is to ensure that these physical realities are represented within the wider economic operation of the electricity system.
Rather than treating the network as an external engineering constraint, FP-AMM incorporates network limitations directly into market coordination while recognising that the network itself is a long-lived shared infrastructure.
Purpose
The Network Economics layer performs five fundamental functions.
- Represent physical network constraints within market operation.
- Allocate scarce network capacity during periods of congestion.
- Provide transparent signals for future network reinforcement.
- Recover the costs of shared infrastructure and common system services.
- Ensure the economic operation of the market remains consistent with the physical operation of the electricity system.
Together these functions connect engineering and economics into a single coordinated framework.
The Network as Shared Infrastructure
Unlike electricity, which is continuously produced and consumed, the electricity network is a long-term public asset.
Transmission lines, substations and distribution networks are constructed over decades and provide value to every participant connected to the electricity system.
Consumers and businesses generally have little direct influence over these strategic investment decisions.
They do not decide where substations are built, which transmission corridors are reinforced or how the network evolves over time.
For this reason, FP-AMM treats the majority of network infrastructure as shared infrastructure whose long-term costs are broadly socialised across network users using transparent charging arrangements, consistent with existing regulatory practice.
This recognises that the network exists for the benefit of society as a whole rather than any individual participant.
Physical Constraints
Although the network is shared, it is not unlimited.
Every transmission line, transformer and distribution feeder possesses finite operating limits.
These constraints determine how much electricity can be transported safely through the network.
Most of the time sufficient capacity exists for electricity to flow freely.
Occasionally, however, parts of the network become constrained.
When this occurs, network capacity becomes the scarce resource rather than electrical energy itself.
Representing these constraints within market operation ensures that economic decisions remain physically achievable.
Congestion as Economic Information
Congestion is often viewed purely as an operational problem.
Within FP-AMM it is also valuable economic information.
Persistent congestion indicates that additional network capacity would provide value to the electricity system.
Rather than suppressing this information through administrative intervention, FP-AMM allows congestion to become visible through market operation.
Participants located on different sides of a constrained network may therefore observe different economic conditions, encouraging behaviour that naturally reduces congestion while simultaneously revealing where additional infrastructure would provide the greatest benefit.
Congestion therefore serves both an operational purpose and a planning purpose.
Network-Aware Prices
The value of electricity depends not only upon when it is produced but also where it can physically be delivered.
The Automatic Market Maker therefore incorporates network constraints directly into price formation.
When parts of the network become constrained, local prices naturally reflect the increased value of scarce network capacity.
As congestion is relieved these differences diminish automatically.
Prices therefore become a continuous representation of the physical state of the electricity system rather than purely an accounting mechanism.
Allocation of Scarce Network Capacity
Price should resolve the majority of congestion.
Participants capable of adjusting generation or demand voluntarily respond to changing market conditions.
However, severe network constraints may still require explicit allocation of scarce network capacity.
Where this occurs, FP-AMM applies the same principles used elsewhere throughout the architecture.
Economic signals resolve scarcity wherever possible.
Where scarcity remains unavoidable, the Fair Play mechanism allocates the remaining network capacity according to consumer Service Levels and accumulated fairness history.
This ensures that unavoidable constraints are managed transparently, consistently and fairly.
Planning and Reinforcement
Persistent congestion provides evidence that additional infrastructure may be justified.
Because FP-AMM continuously records where and when scarcity occurs, the market naturally generates a history of network utilisation.
This information becomes a powerful planning tool.
Rather than relying solely upon engineering forecasts or administrative judgement, planners can identify locations where congestion persists over long periods and where reinforcement would deliver the greatest benefit.
As new infrastructure is constructed, congestion naturally reduces and the corresponding economic signals diminish.
The market therefore creates a continuous feedback loop between operational performance and long-term investment.
Shared Infrastructure and System Services
Not every cost within the electricity system can or should be attributed directly to individual market participants.
Some costs arise from assets and services that exist for the benefit of the electricity system as a whole rather than any individual consumer or generator.
Examples include:
- transmission infrastructure,
- distribution infrastructure,
- control centres,
- system operation,
- forecasting,
- cyber security,
- protection and control systems,
- frequency control,
- voltage support,
- inertia,
- reserve procurement,
- black start capability,
- restoration services,
- other ancillary services.
These services maintain the safe, secure and reliable operation of the electricity system.
Individual consumers and businesses have little practical control over the quantity of these services procured or the engineering decisions that determine their provision.
Consequently, FP-AMM treats these as shared system costs.
Rather than attempting to recover them through highly granular participant-specific charges, they remain broadly socialised across network users using transparent and predictable charging arrangements.
Cost Allocation Philosophy
FP-AMM distinguishes between participant-specific costs and shared system costs.
Where costs arise directly from participant behaviour, they should be recovered according to cost causation wherever practical.
Examples include:
- energy consumption,
- contracted power requirements,
- reliability choices,
- new connection assets,
- identifiable local network impacts.
Where costs arise from maintaining shared infrastructure or operating the electricity system as a whole, they are more appropriately recovered across the wider participant base.
Examples include:
- existing transmission and distribution infrastructure,
- system operation,
- ancillary services,
- resilience,
- common engineering functions.
The objective is not perfect attribution of every pound of expenditure, but an economically coherent framework that provides efficient incentives while recognising the shared nature of electricity infrastructure.
Distributed Networks
Modern electricity systems increasingly comprise millions of distributed energy resources connected throughout the distribution network.
Electric vehicles, batteries, rooftop solar, heat pumps and flexible demand all influence local power flows.
Consequently, network economics extends beyond the transmission system.
The same economic principles apply throughout the electricity network, allowing congestion to be represented and coordinated wherever physical constraints arise.
This enables the market to operate consistently across transmission and distribution networks without requiring separate economic frameworks.
Relationship with Other Market Layers
The Network Economics layer interacts continuously with every other component of FP-AMM.
The Wholesale Market coordinates the exchange of electrical energy.
The Retail Market defines the electricity services purchased by consumers and recovers participant-specific costs according to the demands consumers place upon the wider system.
The Capacity and Availability Market provides long-term investment signals for generation and flexibility resources.
The Automatic Market Maker ensures that all market outcomes remain physically feasible.
The Fair Play mechanism allocates unavoidable scarcity whenever network capacity cannot satisfy all requests simultaneously.
Together these components create a coordinated economic architecture in which engineering constraints and market behaviour remain closely aligned.
Summary
Within FP-AMM, the electricity network is treated as both a physical asset and an economic resource.
Physical constraints influence market operation, congestion provides transparent operational and planning signals and persistent scarcity identifies where future reinforcement delivers the greatest value.
At the same time, the network and the common services required to operate it remain recognised as shared societal infrastructure whose long-term costs are broadly socialised across users.
Rather than attempting to create markets for every aspect of electricity system operation, FP-AMM applies market mechanisms where they provide efficient coordination while recognising that shared infrastructure and common system services are collective assets that support the electricity system as a whole.