Regen’s CEO, Merlin Hyman, dissects current discussions on power market reform and the potential impacts for progress towards net zero.
NB: BEIS’ Review of Electricity Market Arrangements consultation has now been published here.
We are expecting the government to publish a consultation document on its Review of Electricity Market Arrangements (REMA) before the summer recess. It is also clear the government is considering, alongside REMA, short term market changes to try and address high power prices.
Given the potential importance of these changes for our industry and net zero, Regen will be engaging closely in the process. We ran a webinar on 12 July to discuss the impact these changes could have on renewables, storage and other low carbon technologies and we will also be publishing papers and blogs on the options and how they would affect net zero.
REMA timescale and aims
The aim of REMA is to ensure power markets enable the achievement of net zero power at least cost. This is likely to be framed positively as enabling us to benefit from low cost renewables. However, rapidly rising balancing / constraint costs for the Electricity System Operator have also fuelled concern in government that without changes, more renewables will equal higher ‘system costs’. In our view, many of these system costs actually stem from delays in infrastructure investment and not having sufficient flexibility on the system which could be addressed through innovation and other net zero market reforms.
REMA will be a medium term process, taking a careful approach to considering possible electricity market changes. This first consultation document will set out a range of options and invite input.
Boris Johnson confirmed recently that the government is also considering short-term changes in the market to address current high power prices by addressing what he described as the ‘ludicrous’ situation that the marginal cost of power is set by the price of gas. This was trailed by the Chancellor in his Statement on the Cost of Living on 26 May, that stated:
“As set out in the Energy Security Strategy, the government is consulting with the power generation sector and investors to drive forward energy market reforms and ensure that the price paid for electricity is more reflective of the costs of production. Those reforms will take time to implement. In the meantime, the government will urgently evaluate the scale of these extraordinary profits and the appropriate steps to take”.
Other countries have put in measures to address power prices such as the ‘Iberian model’ which has capped the wholesale price of gas used for power generation.
Options
There are a range of potential options for reform. BEIS’ overall view seems to be that options that reduce the cost of capital for renewables will increase system costs and vice versa and so there is a balance to be struck between those two factors in any reform.
While this may be partially true, we believe a better framing of the reform agenda is to seek to strike a new deal, a new covenant, between low carbon energy providers and the consumer. The basis of this deal would be providing investors in clean energy with greater revenue certainty, in exchange for lower cost energy for the consumer. The significant fall in the cost of renewables compared to fossil fuels has created the possibility for this to happen.
The broad options on the table include:
1. Incremental change
There is plenty of scope for developing and adapting the current market structure that investors are familiar with, to ensure that consumers benefit from low-cost renewables. We have seen the government commit to annual Contracts for Difference (CfD) auctions recently. There is a current investigation into whether some power plants are using their market power to game the Balancing Mechanism that could lead to changes to the rules. Changes to the Capacity Market to value speed of response as well as duration have been suggested. We would also like to see an expansion of the long term Power Purchase Agreement (PPA) market for renewable energy which could be supported in a variety of ways, including incentives for energy suppliers to forward buy energy and reform of the way in which carbon intensity of energy is tracked and reported via REGOs.
2. Locational Marginal Pricing
A shift from one wholesale market to ‘nodal’ pricing based essentially on grid capacity at that ‘node’ has been proposed extensively in recent months with the ESO commissioning research and some very active champions such as the Energy Systems Catapult. Regen is concerned that such a move would deter renewable energy investors as the value of power at a particular node on the system would vary. We also think a move to LMP, and therefore centralised dispatch, would be a backward step in the transition to a smarter, more flexible and more participative, net zero energy system. We have published a short paper on our review of markets such as Texas that use nodal pricing.
3. Market separation between low and high marginal cost generators / Green Power Pool
There are a range of proposals that, at heart, would involve renewable generators giving up some potential upside value for longer term price certainty (as those with a CfD or long term PPAs currently do).
To ensure the sector has a voice in this process and the practical implications on our industry are fully considered, we are planning on setting up a group of interested members to consult with on the impact of different options as they progress. If you are a member of Regen or the Electricity Storage Network, please contact Estelle Limon (elimon@regen.co.uk) to express interest.