Regen welcomes today’s publication and congratulates the REMA team for navigating the report through its final sign-off by government ministers.
In contrast to what has been spun in the press, the actual consultation document contains positive proposals which do move the market reform debate forward. However, there is still a lot to be done through the second consultation to finalise a package of market reform that can be implemented.
Progressive market reform
Regen is especially pleased to see that there is now a focus on exploring the opportunities and potential to make meaningful market reforms within the existing national GB market structure. We are calling this the Progressive Market Reform agenda and will be publishing more detail on what this means and how it can be implemented in the coming weeks.
We are also pleased to see that the nodal Locational Market Pricing (LMP) and ‘splitting the market’ reform options are not being taken forward. These were never feasible options in a period of net zero transition and would have represented a step backwards for investment and market design.
Focused on key market challenges
We are also pleased to read that the second consultation will be focused around four key challenge areas which are closely aligned with the objective of achieving net zero, reducing consumer bills and maintaining energy security:
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- Passing through the value of a renewables-based system to consumers
- Investing to create a renewables-based system at pace
- Transitioning away from an unabated gas-based system to a flexible, resilient, decarbonised electricity system
- Operating and optimising a renewables-based system, cost effectively.
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“In our response to the initial consultation we highlighted the need to ensure that REMA is focusing on the right priorities for reform. We are, therefore, pleased to see that the second consultation has refocused the reform options around four new challenge areas, which take a more pragmatic approach and focus on the outcomes that are needed.” – Ellie Brundrett
The rest of the consultation contains pretty much what the industry had expected, including a strong focus on reform of the Contract for Difference scheme, changes to the Capacity Market and to the Balancing Mechanism to support flexibility and greater use of long-term corporate PPA contracts. All good stuff, to which Regen will be responding through the consultation process.
Zonal pricing
As expected, a form of zonal pricing remains an option, although, unlike some media reports, we are a long way from any decision on this. Regen’s viewpoint is that it is reasonable to continue to explore zonal, but that the rationale, for what would still be a major market upheaval, is somewhat confused. It could be to give stronger investment siting signals, or to increase price volatility to dive flexibility, or to increase competition and lower prices within renewable dominated zones. However, all of these objectives could be achieved more quickly and more efficiently within a progressive reform package, and with far less investment risk and negative impacts to the consumer.
One area where a form of zonal pricing could play a role is in relation to how we manage interconnector flows with our EU partners and, in fact, we will be obliged to consider zonal for as long as it remains an option within the wider European market reform debate. Even here, however, we believe that there are better solutions, including the ‘recoupling’ of our interconnector links to Europe, better strategic planning of interconnection and providing the system operator with the means to better manage flows and capacities. We should also be harnessing the inherent flexibility of interconnectors rather than trying to corral the market. There has been an increasing focus on interconnection in recent months and we expect that this area will stimulate further analysis and discussion throughout the consultation period.
Hijacked by politics?
The most disappointing, although hardly surprising, aspect of today’s announcement is how the publication of this important document has been hijacked to make a highly politicised point about building more unabated gas generation capacity. It has long been recognised that there will continue to be a role for gas during the energy transition, and that even when we have a ‘clean power’ system there will be a need to have gas plant as backup and for energy security, with the expectation that the utilisation for such plants will be extremely low.
“We welcome this consultation and its explicit objectives to make a net zero power system work and accelerate the transition away from unabated fossil fuels. It’s disappointing that the consultation launch has been somewhat hijacked to make a political point about gas generation but, once the spinning subsides, we can get on with the important task of working through the options for market reform.” – Johnny Gowdy
The focus of REMA has been to look at how we can accelerate the transition away from gas and channel more investment into flexibility and low-carbon alternatives such as CCUS and hydrogen power generation. The discussion around fossil gas has been about how we can make revenue support conditional on the readiness and eventual conversion of plants to a low carbon fuel and, for those that do not transition, how we can manage their ‘end of life’ within some form of strategic reserve. The objective therefore is to manage and limit the use of gas, both to achieve our carbon targets and to make us less dependent on foreign imports.
Regen has two market reform events coming up which may be of interest:
- 27 March: Market Reform Implications for the Offshore Wind Sector. This webinar will look at market reform specifically from the perspective of the offshore wind sector.
- 22 April: The UK’s Review of Electricity Market Arrangements. This in-person event will hear directly from DESNZ representatives to debate the most important issues for the clean energy sector, review the reform options following this second consultation launch and discuss the next steps with leading developers and investors. We will also use the event to shape our consultation response and will be launching our most recent paper on this topic.
We will be engaging with our Regen and Electricity Storage Network members over the coming weeks to inform our consultation response ahead of the 7 May deadline. More details on this to come.
The Department for Energy Security and Net Zero has today published its long-awaited follow-on consultation as part of the Review of Electricity Market Arrangements. Here, Regen’s Johnny Gowdy and Ellie Brundrett respond to the main takeaways from the document.