Without reform of the market, the UK will miss its 2035 electricity decarbonisation target according to a new report from centre-right think tank Onward.
It follows the government announcing its Review of Electricity Market Arrangements (REMA) in the British Energy Security Strategy in April, which seeks to confront challenges around intermittent generation from renewables as demand for electricity is set to double by 2050.
According to Onward, there are five key questions the review needs to answer, including how the UK’s electricity system be operated affordably and securely with lots of renewables, how markets can fairly reflect the costs and benefits of different generators and customers, and how the link between gas prices and electricity bills can be broken.
This last question follows the government suggesting it could decouple gas and electricity as part of a suite of ‘urgent’ electricity market reforms, in comments made in June.
Additionally, the REMA should ask what the role is for markets versus Government-run investment-support schemes, and what the role of customers in a net zero electricity system being targeted is.
Following on from these key questions, Onward has set out three recommendations within its Powering the Future: Why the Review of Electricity Market Arrangements is so important report.
And we propose structuring REMA as three overlapping programmes of reform:— Ed Birkett (@ed_birkett) July 4, 2022
1⃣ Reforming wholesale and balancing markets
2⃣ Reform investment-support schemes
3⃣ Reform supplier regulation
First of which is the reform of wholesale and balancing markets. This would mean a major change to the wholesale electricity market, but could help to deal with rising network constraints and answer questions about the future of marginal pricing.
As part of this, the location of customers and generators should be taken into account, the think tank added. This follows research from the Energy Systems Catapult that suggested that locational pricing could save £30 billion by 2035.
With reforms to the wholesale electricity market, changes will be needed to ensure now balancing services can be integrated to ensure the grid remains secure as more renewables are added. National Grid ESO has been updating and expanding its range of services over recent years to meet the emerging demands of a decarbonised grid, including launching two new frequency services this year, dubbed Dynamic Regulation and Dynamic Moderation.
Demand remains high for frequency services in particular, with clearing prices for Dynamic Containment Low seeing record high prices over the last month for example, hitting £105/MWh on June 25 – £1 more than the previous high in April.
Onwards second recommendation is that the REMA leads to reform of the renewable investment support schemes such as the Capacity Market and Contracts for Difference (CfD). It suggests the current system risks supporting the wrong mix of technologies, which would ultimately raise bills.
As such, support systems should be reformed to bring forward the optimal technology mix at an affordable cost, and encourage companies to operate their assets efficiently.
“Over the last 15 years successive governments have introduced a byzantine array of schemes to support different technologies,” said John Penrose, MP for Weston-super-Mare.
“But as Onward’s new report sets out, with almost all new projects getting some taxpayer-funded support, it’s not hard to see why it’s created a boom for lobbyists, with all the costs ultimately being passed on to customers. We should let energy firms find answers for our newly-modernised wholesale electricity market so they can buy the best of whatever they’ve got, rather than politicians trying to pick winners.”
The CfD scheme in particular is widely considered to have been a success, driving significant growth in the offshore wind sector in the UK. Indeed, as wholesale power prices have grown, projects developed through the CfD scheme have actually returned around £39,222,407 to energy suppliers.
Recently there have been calls for the cost of such schemes to be shifted away from electricity bills, to help ease the transition to electrified heat for example by reducing electricity bills. This includes the Climate Change Committee called for policy costs due to historical subsidies to be moved off electricity bills and onto general public spending for example.
The final recommendation in Onward’s new report is the reformation of the regulation of energy suppliers. It argues that the distinction between “downstream” and “upstream” within market design is becoming blurred with the rollout of technologies like smart meters. With the growing importance of electric vehicles and heat pumps, there is now huge potential for customers to participate in the upstream market, with regulation reformed to encourage this.
Beyond the release of this report, the think tank is planning to publish a full suite of recommendations for the REMA in Q4 2022 or Q1 2023.
Onwards full report can be read here.