The Government opened its consultation on the Review of Electricity Market Arrangements (REMA) on 18 July. The consultation aims to identity reforms needed to ensure that electricity market design is fit for purpose as the electricity sector decarbonises. However, it is clear that the foci of security of supply and affordability for consumers remain, and indeed are given just as much weight as ensuring achievement of net zero by 2050.
Reviewing the consultation, it is evident that:
- the scope of the review is perhaps wider than anticipated. The consultation included options for changing the locational structure, means of dispatch and price-setting basis of the wholesome market, alongside changes to support schemes, flexibility incentives and operational delivery. BEIS is genuinely looking at options that could bring forward changes to the electricity market of a scale not seen since privatisation and the perceived need for reform from BEIS is clear. BEIS is considering the full range of possible options, from incremental modifications to existing arrangements to transformational changes to the structure of Great Britain’s electricity market. BEIS have largely remained silent on any preference and are looking to industry participants to provide feedback to shape the reforms and packages of options.
- particularly given the huge public and political scrutiny of rising energy bills there is, unsurprisingly, a focus on development of domestic energy sources and reducing energy imports, including encouraging development of low carbon flexible services which can be built at scale. Capacity adequacy and flexibility are key areas of the consultation.
- this is a significant undertaking and change will take time – BEIS state that this is the first step in a process. Changes are unlikely to be made until the mid-2020s, with the aim of a revised decarbonised and secure electricity system being in place by 2035. However as, by 2027, existing support schemes could have already locked in one third of the capacity needed in 2035, one of the key challenges is keeping stability in the market whilst any reforms are agreed and implemented.
- maintaining investor confidence is key. If the UK is to meet its 2050 net zero target, over 10GW of new generation is required on average each year until 2035 (against a historic average of 5-6GW) and £280-400 billion of investment is required in generation capacity and flexible assets. This shows the scale of the rollout still required. Indeed investor confidence is one of the five criteria listed that BEIS will use to assess market options (alongside least cost, deliverability, whole-system flexibility and adaptability).
- whilst the consultation acknowledges the success of the Contract for Difference (CfD) in bringing forward new renewable generation, there is a concern that the CfD contract significantly limits exposure to price signals and therefore reduces incentives for plant to operate more flexibly. Similarly, whilst the Capacity Market has supported investment in 15GW of new, flexible capacity, BEIS acknowledges that the current design of the Capacity Market is unlikely to favour low carbon flexible technologies, therefore locking in reliance on high carbon technologies, including unabated gas, beyond 2035. All of this suggests that there could be step-change in the design of incentive schemes.
The REMA consultation suggests that whilst BEIS’s focus is on a vision of future market arrangements that will address the energy trilemma, the route to achieving this is very much open to debate. The consultation is open until 10 October, which means that the sector needs to analyse and respond to the range of options proposed in only 12 weeks. BEIS is expecting to publish a consultation response in winter 2022, followed by extensive engagement with the sector to develop options throughout 2023.
It remains to be seen how industry participants will respond, but there will be winners and losers depending on the eventual shape of the reforms. Whilst implementing the reforms will be complex, and BEIS will need to consider the impacts and challenges of any changes alongside the benefits, Government sees these market reforms as a key enabler to deliver the policy goals set out in its Energy Security Strategy.
We have the opportunity to design an electricity system which passes the savings of renewable electricity generation onto consumer bills, keeps us on our world-leading decarbonisation trajectory, and ensures our supply of energy is secure and stable