Source: Gov.uk

Electricity market reform may see consumers paying less for renewables

The UK government has announced plans for a consultation which it hopes will drive the ‘biggest electricity market reform in a generation’. Titled the “Review of Electricity Market Arrangements” or REMA, the consultation opened on 16^th July 2022 and will run until 10^th October this year. The consultation will seek the views of key stakeholders on the recently published Energy Security Strategy itself created in response to the energy crisis. This publication already proposed an increase in nuclear energy, a drive for renewables, and help for families with their growing energy bills.

REMA’s aim is to identify the reforms needed to move towards a more secure, affordable and decarbonised energy market. According to the UK Government, some of the changes being consulted on include:

• introducing incentives for consumers to draw energy from the grid at cheaper rates when demand is low, or it’s particularly sunny and windy, saving households money with cheaper rates
• reforming the capacity market so that it increases the participation of low carbon flexibility technologies, such as electricity storage, that enable a cleaner, lower-cost system
• de-coupling costly global fossil fuel prices from electricity produced by cheaper renewables, a step to help ensure consumers see cheaper prices as a result of lower-cost clean energy sources[i]

Traditionally in the UK, wholesale electricity prices are coupled with gas; thus, the surge in gas prices has driven wholesale costs on an upward trajectory in tandem. This means that even those purchasing renewable energy are facing the effect of sky-high gas prices, even at times when renewable energy is likely to be cheaper.

Business and Energy Secretary Kwasi Kwarteng has said:

“We’ve just seen the price of offshore UK wind power fall to an all-time low, and gas is a shrinking portion of our electricity generating mix, so we need to explore ways of ensuring the electricity market is adapting to the times. That includes ensuring the cost benefits of our increasing supply of cheaper energy trickle down to consumers, but also that our system is fit for the future – especially with electricity demand set to double by 2035. In what could be the biggest electricity market shake-up in decades, I am confident that this review will significantly enhance GB’s energy security and supply for generations to come.”[ii]

Locational pricing being considered

REMA also proposes further changes, exploring the concept of ‘locational wholesale pricing’, whereby prices in each location in the transition network vary. The documents note that this approach has already been successful in some parts of the USA, New Zealand and Canada. If this change were implemented, there would still be a central dispatch process. The REMA consultation documents state the following:

“Locational wholesale prices would send strong locational investment signals for all generation, storage, and demand which is exposed to the wholesale price to site in locations that reduce system costs. This would enable more efficient network development, through increased transparency of where network constraints are, how frequently they occur, and their economic importance. It could also bring some first-of-a-kind low carbon technologies to new locations.”[iii]

However, the government paper does caution that many locations where renewable energy sites would be beneficial (such as offshore wind) often sit on the fringes of the UK’s electricity infrastructure; thus, we could see higher investment costs for arguably less benefit. It could be argued that decentralisation, as offered by recent blockchain backed Peer-to-Peer energy schemes is a potential solution to this. We explore this emerging solution in our upcoming blog launching Thursday 28^th July.

New technologies & flexibility under consideration

One of the big issues at present is the longer-term storage of energy. As Edie.net notes, the REMA documents acknowledge that technologies such as battery storage and low-carbon hydrogen production will be necessary to scale flexibility at the rate needed to meet climate goals while maintaining energy security and keeping costs down. When looking at storage specifically, REMA asks respondents for their view on how best to reshape the wholesale and balancing markets to reduce incentives for charging and discharging frequently, shifting instead to longer-duration storage. For more on this very topic, read our recent blog, ‘The Beginning of the End for Age Old Storage Problem for Renewable Energy?’

A further area for exploration is that of flexibility in use of the energy grid. With new technologies such as EVs (Electric Vehicles) expected to place increasing pressure on the UK’s electricity supply, it has been suggested that incentives could be given to consumers to avoid usage at peak times, instead using energy supplies overnight when demand is much lower. Edie.net argues that REMA suggests a joined-up, at-scale approach will be needed to help business and domestic energy consumers see the financial returns of either using less energy or ‘flexing’ their energy consumption to use the grid during periods of low demand and low carbon intensity in the electricity mix[iv].

References

[i] UK launches biggest electricity market reform in a generation - GOV.UK (www.gov.uk)

[ii] UK launches biggest electricity market reform in a generation - GOV.UK (www.gov.uk)

[iii] Review of Electricity Market Arrangements (publishing.service.gov.uk)

[iv] Customers set to pay less for renewable electricity as UK plans ‘biggest electricity market reform in a generation’ - edie

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