The energy industry’s welcome for the opening of the Review of Electricity Market Arrangements‘ (REMA) second consultation has been somewhat dampened by the UK government’s coinciding announcement of support for new gas power plants.
The second REMA consultation was opened yesterday (12 March) and included a number of compelling proposals put forward by the Department for Energy Security and Net Zero (DESNZ), one of which was the indication that zonal pricing should receive further investigation.
On the same day, energy secretary Claire Coutinho gave a speech on the UK’s energy security strategy at Chatham House voicing support for the construction of new gas power plants.
A move that divided the UK’s energy industry’s response to the latest update to the UK’s energy security strategy.
“I say this to all our electricity generators here in the UK: renewables will play an ever-more critical role in powering Britain, but I will not risk our energy security by refusing to address the difficult short-term choices we need to make,” said Coutinho in yesterday’s speech.
“The government will stand with you as you invest in building more gas power stations.”
Introducing stronger locational signals
A proposal that elicited much attention from the energy industry was zonal pricing which Coutinho said had been transferred to the second consultation “to explore more thoroughly”.
Unlike the current national system which sets a uniform market price, a zonal market splits electricity prices across a few large regions where all consumers within a defined zone or region are charged the same price.
Research and technology organisation Energy Systems Catapult praised the move stating: “We agree with DESNZ’s conclusion that zonal pricing would enable consumer savings and locational operational signals that alternative options to locational pricing cannot deliver.”
ES Catapult has repeatedly voiced support for locational pricing. Its most recent report – conducted alongside FTI Consulting- was commissioned by Ofgem and found that a zonal market could create consumer savings in the range of £15 billion to £31 billion between 2025 and 2040.
Praise for locational pricing was echoed by Greg Jackson, CEO and founder of Octopus Energy who said: “Our ridiculously distorted energy market forces us to send electricity to France when we need it most and pay a premium to buy it back from Norway, all while paying Scottish wind farms to switch off.
“With locational pricing, customers will save hundreds of pounds a year on bills and parts of the UK will see the lowest electricity prices in Europe, attracting new industry and reducing the need for new pylons.
“It’s right that the government is progressing zonal pricing and the energy sector must now work together to get this up and running swiftly so we can attract new industries – from data centres to manufacturing – and customers can benefit from cheaper electricity fast.”
Voicing opinions expressed during the first REMA consultation, Anthony Ainsworth, chief operating officer at npower Business Solutions said concerns remain over the speed at which a zonal pricing system could be deployed, due to it’s complexity.
A slow or stalled implementation could both impact investor confidence and negatively affect market liquidity.
“Therefore, it is a delicate balancing act to ensure the needs of all stakeholders – from across the energy sector through to the end-user consumers – are met,” said Ainsworth.
New gas power plants ‘hijacked’ consultation launch
Johnny Gowdy, director at market insight company Regen, also welcomed the consultation’s “explicit objectives to make a net zero power system work” but expressed regret that it had been “hijacked” by government support for new gas power plants.
“It’s disappointing that the consultation launch has been somewhat hijacked to make a political point about gas generation but, once the spinning subsides, we can get on with the important task of working through the options for market reform,” said Gowdy.
Christopher Williams, CEO of solar thermal manufacturer Naked Energy, expressed strong disapproval for backing gas power plants, stating that relying on fossil fuels for cheaper bills and energy security was a “mistake.”
“The North Sea’s gas is running out, and when it does we will be at the mercy of foreign imports and the price volatility that comes with it. Considering that none of the CO2 from this gas will be captured, it’s a lose-lose for customers – their bills and our emissions will go up,” said Williams.
“The Climate Change Committee (CCC) has said that a ‘small amount’ of gas generation without carbon capture is compatible with a decarbonised power system, but that might only be two percent of the market (equivalent to only 15 hours of electricity a month).
“As renewable energy takes more of the market share, why would any private sector company invest in natural gas? Two percent of the market is far too small a portion to encourage investment, unless it comes with significant state-backed subsidies.”
Why does Britain need gas for energy security?
The reason most cited by the government for continuing to back fossil-fuels is to support a net zero transition by providing energy at times when renewable or low-carbon technologies cannot.
“There are no two ways about it. Without gas backing up renewables, we face the genuine prospect of blackouts,” said Coutinho.
Ainsworth believes this to be a “sensible decision” but warned that the UK must remain on track for its net zero by 2050 target.
Juliet Phillips, UK energy programme lead at think tank E3G highlighted that it was both governmental and policy failures in supporting a stronger renewable energy market that has led to the need for more gas plants.
“Due to policy failures over the last parliament, the government has missed opportunities to build out the full offshore-wind pipeline, to make gains in energy efficiency, or address clunky network connection times – all factors that mean new gas plants have been announced today,” said Phillips.
To avoid the same mistakes Phillips urged that the strict conditions suggested by the government for new gas power plants – including that they must be carbon capture or hydrogen ready – must be implemented.
“More political attention is needed to often-over looked power solutions – like long-term storage and demand side flexibility – in order to get the UK off volatile fossil gas imports for good,” Phillips added.
An expensive back up
The CCC has confirmed that using energy supplied by gas for 2% of the time during the 2030s will still be net zero compliant; however, Frank Gordon, director of policy at the Association for Renewable Energy and Clean Technology (REA) suggested that greener options such as bioenergy with carbon capture could “just as easily” provide these security benefits.
“It begs the question of why to build [new gas power plants] in the first place when there are viable alternatives that could be utilised more. They will be expensive backups that could just as easily be provided by green options, including bioenergy with carbon capture; a considerable expansion in biogas and electrolytic (clean) hydrogen; alongside an ambitious energy efficiency programme, and ramping up the use of energy storage and other flexible technologies,” continued Gordon.
“The misguided argument that building new unabated fossil fuel gas plants will be the answer to the energy security crisis – caused by our reliance on this exact energy source – is short sighted and does not face up to the very real challenges the UK will face should Net Zero targets not be met.”
