Post: UK launches biggest electricity market reform in a generation

UK launches biggest electricity market reform in a generation

The government has launched a “transformational” review into the nation’s electricity market, which could see sweeping reforms to electricity pricing, procurement and storage.

With the UK’s electricity demand set to at least double over the next 13 years, The Review of Electricity Market Arrangements (REMA), launched on 18 July, aims to establish a fit-for-purpose market design and implement the reforms needed to electricity markets. Launching the review business and energy secretary Kwasi Kwarteng said: “In what could be the biggest electricity market shake up in decades […] this review will significantly enhance GB’s energy security and supply for generations to come.”

Aiming to address the combined challenges of responding to higher global energy costs, the need to further boost energy security and transition to a net zero energy system, REMA centres on the enduring market arrangements needed to deliver a “fully decarbonised and cost-effective electricity system by 2035, subject to security of supply”. It focuses on options for reform for all (non-retail) electricity markets: the wholesale market, balancing mechanism and ancillary services; as well as policies that impact these – including the evolution of and alternatives to the Contracts for Difference scheme and the Capacity Market.

It noted that, in a future system the demand side has the potential to be much more active. Responsive consumers, including domestic, industrial and commercial consumers, will be vital to reduce the scale of the flexibility challenge by changing the time when they consume energy, for example when they charge electric vehicles and run their heat pumps. Additional flexibility could also be secured through consumers flexibly charging and discharging domestic batteries and self-consuming and exporting electricity from rooftop solar PV panels.

Some of the changes considered by the review include introducing incentives for consumers to consumer energy at cheaper rates when demand is low, reforming the Capacity Market to increase participation of low-carbon flexibility technologies.  

BEIS also aims to de-couple fossil fuel prices from electricity produced by renewables, which at present tend to be cheaper. Under the current system, gas prices often end up setting the wholesale electricity price because of their flexibility. They can produce more or less electricity according to demand and therefore play a key role in setting the overall price of electricity from all sources. The REMA consultation intends to explore routes for “updating” this pricing system to reflect the abundance of cheaper renewables, which it said would help consumers see the benefits of renewable technologies. The government also plans to consult on a form of localised pricing.

The consultation forms part of a review first announced in the British Energy Security Strategy in April, which also outlined plans to expand nuclear, offshore wind and hydrogen to ensure 95% of UK electricity is low carbon by 2030. Views are invited by 10 October 2022. Following this consultation, BEIS will further refine options during 2022-23 before delivering any proposed reforms.

GridBeyond Managing Director UK and Ireland Mark Davis said: