Customers set to pay less for renewable electricity as UK plans ‘biggest electricity market reform in a generation’
The UK Government has opened consultations on the most sweeping set of changes to Britain’s electricity market design in more than a decade, including measures to de-couple global gas prices from the rate consumers pay for renewable electricity.
The consultations, called the Review of Electricity Market Arrangements (REMA) opened today (18 July) and will run until 10 October. REMA is seeking stakeholders’ views on a number of key changes first proposed in the Energy Security Strategy, which was published in April in response to the energy price crisis that began last summer and has been exacerbated by Russia’s war in Ukraine.
While that Strategy put forward much additional support for North Sea oil and gas and laid the foundation for a U-turn on the Government’s fracking ban, it also increased targets on clean energy, with updated 2030 ambitions for offshore wind, low-carbon hydrogen and nuclear.
Many of the issues covered by REMA cover the environmental prong of the so-called energy trilemma, which also covers energy security as well as costs. The REMA documents state that delivering a net-zero wholesale market and mass low-carbon power are two of the core outcomes sought from the changes. Other core outcomes are increased flexibility, capacity adequacy and better operability.
For instance, the Government is consulting on how best to de-couple global gas prices from electricity prices. Prime Minister Boris Johnson spoke out in favour of change at last month’s G7 Summit in Germany.
In the UK, wholesale electricity prices are informed by gas prices, partly due to the historic and present extent of gas-fired generation in the energy mix. It has been pointed out that this is not fair on domestic and business customers who purchase 100% renewable energy, which is likely to be cheaper. This unfairness will only become more pronounced in the future as unabated gas-fired electricity generation is phased out in the UK through to 2035.
REMA proposes ‘locational wholesale pricing’, whereby prices in each location in the transition network vary. The documents note that this approach has already been successful in some parts of the USA, New Zealand and Canada. If this change were implemented, there would still be a central dispatch process.
The REMA documents state: “Locational wholesale prices would send strong locational investment signals for all generation, storage and demand which is exposed to the wholesale price to site in locations that reduce system costs. This would enable more efficient network development, through increased transparency of where network constraints are, how frequently they occur, and their economic importance. It could also bring some first-of-akind low carbon technologies to new locations.”
Business and Energy Secretary Kwasi Kwarteng said: “We’ve just seen the price of offshore UK wind power fall to an all-time low and gas is a shrinking portion of our electricity generating mix, so we need to explore ways of ensuring the electricity market is adapting to the times.”
The Energy Security Strategy and subsequent Energy Security Bill were broadly criticised for missing opportunities to improve energy efficiency – both by improving the fabric of buildings and by encouraging behaviour change. This is despite the fact that energy efficiency contributes to solutions under all parts of the energy trilemma.
One measure under consideration through REMA are incentives for customers to avoid drawing energy from the grid when demand is high, for activities such as electric vehicle (EV) charging. REMA acknowledges that there are, at present, “limited market signals for electricity demand reduction” and that a joined-up, at-scale approach will be needed to help business and domestic energy consumers see the financial returns of either using less energy, or ‘flexing’ their energy consumption to use the grid at periods of low demand and low carbon intensity in the electricity mix.
Options on the table include considering whether energy efficiency projects can compete in the UK’s Capacity Market, subject to “significant changes” to market rules, and making it easier for distribution networks to contribute funding to energy efficiency schemes where it reduces network costs.
Another option is a flexibility-focused obligation for electricity suppliers, mandating the provision of low-carbon electricity and the provision of methods to help reduce demand during peak times. Such an obligation, the ‘Clean Peak Standard’, is already used in Massachusetts.
The REMA documents acknowledge that technologies such as battery storage and low-carbon hydrogen production will be necessary to scale flexibility at the rate needed to meet climate goals while maintaining energy security and keeping costs down (partly by avoiding inertia costs associated with wasting clean electricity).
On storage, REMA respondents are asked how best to reshape the wholesale and balancing markets to reduce incentives for charging and discharging frequently, shifting instead to longer-duration storage. This may involve changes to Capacity Market contracts. Respondents are also asked how to incentivise the co-location of storage with low-carbon generation in a way that minimises costs.
The Department for Business, Energy and Industrial Strategy (BEIS) is hosting the REMA In partnership with regulator Ofgem. The organisations expect to publish a response this winter, after “further developing, refining and narrowing down options” based on the consultation responses. Changes could, therefore, be implemented in the last quarter of 2022 or the first quarter of 2023 at the earliest.
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