A Progressive Market Reform Agenda For The Gb Electricity System

At a glance

As the new government takes office, the Review of Electricity Market Arrangements (REMA) has been running for over two years. REMA has stimulated a vigorous debate around whether or not the GB electricity market is fundamentally ‘broken’.

Our view – and that of our members and the majority of industry stakeholders – is that it is not. However, while we oppose the more radical market reform options, which would significantly hinder private sector investment in renewables, we do believe a programme of reform is required.

This paper aims to provide the incoming government, REMA team and wider industry stakeholders with a comprehensive set of reform options based on the retention of an enhanced national wholesale market, with liberalised trading arrangements, that embraces the potential opportunities of a smarter, more flexible and highly digitalised energy system to improve market and operational efficiency, and the delivery of a clean power system.

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Progressive market reform

The paper argues that the current wholesale market model is not fundamentally broken and that radical reform options, including nodal or zonal pricing, will not deliver the benefits claimed, but would instead increase both investment risk and consumer costs. As an alternative, adoption of a progressive market reform agenda can deliver more certain benefits, while accelerating investment in low-carbon solutions and ensuring that the energy transition provides wider value for consumers, communities, economy and society.

It further argues that, while system operation with high renewables will require new market solutions and greater capability within the National Energy System Operator (NESO), there should be no conflict between an agile trading market and efficient system operation.

The progressive market reform agenda is framed within an overarching strategic and spatial energy plan at a national and regional/local level. It is based on greater use of low-carbon flexibility and efficient system operations enabled by:

• Enhanced balancing and flexibility markets
• Wider market access
• Improved forecasting and information visibility
• The digitalisation and automation of market processes, system dispatch and control room functions.

Interconnection efficiency will require a greater level of cross-border coordination, with stronger process and planning integration between GB and neighbouring EU markets.

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Progressive market reform is not about protecting the status quo – far from it. It’s far-reaching and will have big impact, delivering the same, if not better, benefits with less investment and implementation risk.

We welcomed the decision in the second consultation to drop the split market and nodal pricing options, but we’re now asking the new government to drop zonal pricing and instead focus resources and time on the development of the energy strategy, implementation of alternative progressive reform options and the urgent task of securing low-carbon investment.

Johnny Gowdy, director

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Underpinning principles of progressive market reform

Based on a national market model with decentralised dispatch and bilateral trading, the underpinning principles of progressive market reform are that it must:

• Respond to the urgency of the UK energy transition and the new government’s clean power mission, recognising the benefits that decarbonisation will bring to consumers, wider society, industry and economy
• Aim to both create an agile and dynamic market and enable efficient system operation
• Avoid creating a hiatus in the energy transition by balancing the need to make impactful change with the need to maintain momentum within existing reform programmes and investor confidence in the wider market
• Recognise the reality that market reforms will be difficult to implement at a time when the energy sector is in full-blown transition, and can only be achieved with broad support from across the industry, investors and consumer stakeholders
• Ensure that wholesale market reform is considered in the wider context of allied reforms in retail markets, strategic planning, cross-border integration, consumer protection, grid investment and network charging
• Support the principle that risk is best placed where it can be managed
• Ensure that locational signals and markets are aligned with, and do not undermine, the overall Strategic Spatial Energy Plan
• Embrace the opportunities provided by open data, digitalisation, IT integration, automation and AI to enhance markets and system operations
• Place due emphasis on fairness, based on the principle that the consumer should be enabled to become an active participant in the energy market, but should not be unfairly exploited to fix system issues, or exposed to energy system price signals to which they may be unable to respond
• Recognise that the GB electricity market is not fundamentally broken and provides successful principles of a national electricity market, with a rich ecosystem of bilateral trading, but needs significant enhancement to work efficiently in a high renewable generation context.

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