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Print articleThe UK’s Review of Electricity Market Arrangements
January, 2024 - Shoosmiths LLP
The upcoming second Review of Electricity Market Arrangements (REMA) consultation is expected to focus on the deliverability of implementation. While there is a certain level of “status-quo bias,” it is recognised that doing nothing is not a risk-free alternative to REMA reform. The focus is on maximising market synergies and minimising tensions, with the understanding that some tensions are inevitable.
Discussions centred on how REMA can be delivered via a process of “radical incrementalism” by adapting what we already have rather than fundamentally changing the market. In this way individual reviews and reforms, such as reviews of contract for differences (CfDs) and Transmission Network Use of System (TNUoS) charging can feed into the REMA reforms, rather than being seen as a separate exercise. The role of Europe is also important, as the GB electricity market reform should not take place in a vacuum and interconnectors are a significant part of the market picture.
As expected, a bedrock issue in market reform is whether the UK adopts an approach of locational marginal pricing (LMP) or retains the position of a common charging basis across the country. Whilst it seems to be recognised that the status quo does not send the right signals to investors and developers on system capacity and need, the benefits of LMP are still hotly debated. What seems likely (and there were strong hints to this effect) is that the UK will look at a zonal pricing approach. This is not expected to be controversial, though perhaps this “path of least resistance” approach should be balanced with the need to deliver the sustainable and stable long term solution.
Industry views suggest that TNUoS is here to stay but is ripe for reform to ensure that the market gives the right signals to participants. The role of reform on the distribution level is also critically important and needs to reflect the realities of embedded generation.
The second REMA consultation will examine the role of both CfDs and corporate power purchase agreements (PPAs) in delivering long-term outcomes for the grid. Both are recognised as great tools to support the deployment of renewables and decarbonisation, but views are split about the long-term future of CfDs. All options remain on the table for future renewables incentives, including decoupling support from output, deemed generation, and capacity-based payments.
There is, perhaps inevitably, some nervousness on the part of the Department for Energy Security and Net Zero (DESNZ) to rely on the rapid decarbonisation of the generation mix and the availability of sufficient levels of system flexibility. Taking a conservative approach based on today’s system means that DESNZ were discussing the need for new gas peakers to maintain system stability, possibly with market incentives provided to developers to bring them forward. In a vacuum, this is perhaps a logical, but overly pessimistic approach to the speed at which renewable generation, storage and demand flexibility can deliver a balanced grid at distribution and transmission level. A pragmatic, grounded and yet aspirational approach is what the industry should be advocating for in the consultation responses, so that decarbonisation sits alongside energy security as one of the core objectives of market reform, and can deliver clean jobs and industrial growth at the same time.
In a week in which the tax-payer has been committed to nearly £40bn of cost to add carbon capture storage (CCS) to Drax’s burners, it seems somewhat disproportionate to have to make the case for a market and CfDs to support low-carbon generation, but we will nonetheless approach the consultations on REMA with an open and positive mind.
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