On 18 July, the government opened its consultation on the Review of Electricity Market Arrangements (REMA) in which it aims to identify reforms needed to ensure electricity market design is fit for the purpose of maintaining energy security and affordability for consumers as the electricity sector decarbonises.
The consultation sets out a range of options for reform for all (non-retail) electricity markets, including the wholesale market, balancing mechanism and ancillary services, as well as policies that impact these, such as the evolution of and alternatives to the Contracts for Difference (CfD) scheme and the Capacity Market (see page 4). Several areas that fall outside of the REMA scope are also highlighted, including investment mechanisms for large-scale nuclear and the existing cap and floor regime for interconnectors. The government notes that the interactions between the electricity reforms and retail markets will need to be considered in detail. As such, while its electricity market reform and retail market strategy refresh are separate programmes, these will be worked on side by side. The government highlights that the existing market arrangements have helped to deliver the first phase of decarbonisation, the growth of renewables is leading to an increased mismatch between our trading arrangements, which were designed for fossil fuelled plant, and the market’s core technologies.
Challenges associated with this include price cannibalisation, whereby wholesale market revenues alone will not be sufficient to deliver the unprecedented volumes of investment required, missing money, whereby revenues for generators do not accurately reflect the value of investment in reliable energy supply, lack of sufficiently granular temporal or locational price signals, lack of investment signals for low carbon flexibility, with prices currently set by the most expensive generators which is usually gas and limited visibility of generation and demand at the distribution level.
The consultation is the first step in the REMA programme, with the government setting out its case for change of current electricity market arrangements. This has involved an assessment of whether the existing arrangements meet five future challenges identified through scenario analysis in collaboration with Ofgem and National Grid ESO:
- Increasing the pace and breadth of investment in generation capacity, particularly low carbon flexibility assets, increasing system flexibility to manage periods when renewable output is low, providing efficient locational signals to minimise system cost, retaining system operability through bringing forward enough investment in alternatives to high carbon technologies and managing price volatility as the penetration of renewables increases.
The government does not consider that existing market arrangements are likely to meet these future challenges. On this basis, it concludes that there is a strong case for change and that a full range of possible options for reform should be considered. Following the consultation, which closes on 10 October 2022, BEIS will seek to determine and develop what reforms are needed through engagement with the energy sector, and then establish a full delivery plan and oversee implementation.
REMA opens the prospect of a complete overhaul of the electricity market in GB for the first time in over 20 years. The scope is very wide and the perceived need for reform clear with emphasis on security of supply, as well as delivering enduring arrangement for a net zero electricity system by 2035. The timescales are also very ambitious with the expectation of a road map in place ahead of the next general election. The scope goes beyond market price calculations, also bringing in areas such as the Capacity Market, CfDs and balancing services, and how consumers can play a more active role in the transition. If implemented the terms of trade for generators, consumers and investors could change substantially
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