The Department of Energy Security and Net Zero (DESNZ) yesterday (8 March) released the conclusion of its review of electricity market arrangements (REMA) consultation, confirming that 80% of respondents felt current markets are not fit for purpose.
Running from 18 July to 10 October 2022, the consultation was published online and invited views on the vision and objectives for future electricity markets proposed by the government as well as welcoming insights on how best to approach a reform.
Of the total 225 responses to the consultation, the majority were generators and developers at 55, followed by trade bodies with 33 respondents. It ought to be noted that respondents were not required to answer every question and so total responses varied from question to question.
As well as summarising prevalent themes within the responses, the paper also detailed the next steps of the review, notably, which market reform options will no longer be considered as a result of the consultation.
Current± summarised key points from the paper below.
A radical reform?
Although the majority of respondents agreed that the current electricity market no longer operates optimally in the current climate, some respondents questioned the necessity of radical reform.
Those that voted against extensive reform noted how time-consuming it would be, as well as the inevitable disruption to the energy market and possible unintended consequences.
As a result of these considerations the UK government has promised to include more incremental reforms as well as transformational ones.
The role of consumers was also raised in the review, as some respondents felt that their participation in deciding the future of the UK’s energy market must be ensured.
Respondents also drew attention to the need to provide accurate price signals and avoid consumers paying higher prices due to unintended consequences caused by market reform.
Outlining its next steps, the UK government said that it would establish a new end-user forum to invite input from consumers and consumer groups on the market reform whilst also further mapping key
interdependencies between wholesale and retail reform.
Splitting the wholesale market
Respondents were divided as to whether the government ought to continue considering a split market, with 47% of the 148 answering respondents agreeing that it should be and 38% disagreeing.
Those who argued against splitting the market warned of the consequent market disruption whilst also drawing attention to a limited evidence base of its success.
The paper noted that many respondents referenced elements of the existing market arrangements that already provide a level of market-splitting, such as contracts for difference (CfD) and power purchase agreements (PPA), which could be expanded to include a broader range of renewable generators.
Nodal or zonal pricing?
If the market were to be split, two of the potential designs under consideration are nodal and zonal pricing structure.
Nodal pricing refers to a market in which energy prices are determined for multiple locations on the transmission grid, called nodes. Therefore, the price of each node would reflect the locational value of energy.
The paper reported another split between respondent support for this type of market.
Some respondents maintained that nodal pricing would increase transparency by accurately reflecting the full cost of meeting demand at a certain time and location. Disagreeing respondents on the other hand, reportedly voiced concern over the structure’s complex and computationally demanding nature, as well as a potential to reduce liquidity.
This divide corresponds with recent publications from across the energy market.
Both Energy Systems Catapult and the National Grid ESO have named nodal pricing as an attractive solution for the wholesale market and way to reduce consumer costs; however, other members of the energy sector have expressed fears of inducing a ‘postcode lottery’ and a loss of revenue for generators by implementing a nodal pricing structure.
A zonal pricing market charges all consumers within a defined zone or region the same price. Therefore, the market clearing process only considers transmission capacity limitations between zones.
The report noted that some respondents believed that this structure held some benefits over its nodal counterpart; namely its lack of complexity and circumventing the need for central dispatch. Zonal pricing is also already in place in continental Europe meaning it is well-precedented.
Although 55% of the 146 respondents for this question believed that there was no need to consider both nodal and zonal pricing, the UK government has confirmed it will continue reviewing both market structures, writing: “We believe there is merit in continuing to consider both zonal and nodal pricing as means of providing sharper locational signals within market arrangements alongside less transformative options (e.g. minor reform to network charging arrangements) whilst further evidence is gathered on their potential costs and benefits.”
Supporting the capacity market
Of the 103 respondents to this question, 85% agreed that the option of an optimised capacity market (CM) reform should be taken forward.
Investor confidence drawn by an evolutionary approach was one of the main reasons of support cited by respondents, alongside such a reform being a less disruptive mechanism to implement than introducing an alternative.
In response to this support the paper confirmed that the government would keep an optimised CM in its future considerations.
The government also approved the further consideration of centralised reliability options (CRO).
68% of the 76 respondents for this question stated that CROs should be explored, as it could provide a more attractive incentive for generators to increase price stability during stress events.
Market arrangement the government will no longer consider
In total there were six market arrangements that the government verified would no longer be considered as part of REMA:
- Local imbalance pricing – not taken forward as it does not meet the “least cost and investor confidence” criteria
- Capacity payment – discounted due to lacking evidence of greater benefits relative to existing arrangements
- Decentralised reliability options – discounted due to lacking evidence of greater benefits relative to existing arrangements
- Pay-as-bid – not been taken forward as it does not meet the “least cost and investor confidence” criteria
- Dutch subsidy – most respondents did not support this option due to high complexity and uncertain benefits
- Equivalent firm power auction – was not supported by the majority of respondents due to lack of evidence on how it could create a low-cost capacity mix and concern on it increasing risks for renewables
Following the release of the summary of responses, the government has stated its intention to publish a second consultation in 2023.
Addressing that it has almost taken six months from the opening of its first consultation for its results to be published, the government said it will make decisions on shorter-term reforms “more quickly where it is viable to do so”.