The Energy Systems Catapult has proposed a variety of new electricity market reforms as it warns that the current government-directed system risks stifling new smart technologies.
This comes as part of a new report, which detailed how the Energy Act 2013 and accompanying electricity market reforms (EMR 1.0) helped accelerate the deployment of renewables, the mechanisms – with the Contracts for Difference (CfD) and Capacity Market schemes being included within these reforms – were designed for a much less mature market.
The Catapult said the current framework is now progressively undermining wholesale electricity markets and creating a “perpetual reliance” on government decision-making to drive technology choices. In particular, it warned that the CfD and Capacity Market risk inhibiting innovation, misallocating investment, causing system inefficiencies, unfairly weighting investment into generation technologies over demand-side technologies and restricting new entrants and innovation.
It is therefore calling for the government to immediately adapt CfDs to end market distorting impacts, with the phase out of CfDs for mature technologies and the Capacity Market by the mid-2020s. These would be replaced with outcome-based policy mandates for decarbonisation and reliability, which can be complemented with industry-led initiatives that promote financial market development and risk mitigation.
This forms one of the six electricity market reforms it is proposing – dubbed EMR 2.0 – which also includes making the electricity markets work more accurately in time and space, with a recommendation to introduce dynamic and granular wholesale market signals to more accurately reflect system status and physics in real time.
Policy should also be evolved to support financial market development and contracts for investment and support for immature technologies should be redesigned to avoid distorting markets, with innovation ring fenced and early support measures created to maintain technology neutral energy market signals through the transition.
Other reforms include aligning sector strategy and policy mandates with carbon budgets and an overhaul of governance for industry codes, system operation and energy data. The latter of these includes updating sector and digital governance codes, platforms and standards, rebalancing industry representation and accelerating distribution system operator (DSO)/electricity system operator (ESO)/independent system operator (ISO) reforms.
Ofgem issued a recommendation for an ISO in January, citing how potential asset ownership conflicts of interest could act as a barrier to the electricity and gas SOs performing their net zero roles efficiently.
Guy Newey, strategy and performance director at Energy Systems Catapult, pointed to how history shows that consumers and markets are "the key drivers of innovation – and crucially its widespread adoption", adding that the government should "step back from micro-managing the electricity mix and empower electricity consumers and markets to drive demand and shape investment for the biggest impact".