'Biggest electricity market shake-up in decades': Government kicks off energy market reform programme

BEIS launches consultation into wholesale electricity market reform, as first step in a broader review of Electricity Market Arrangements promised in British Energy Security Strategy

The UK government has launched a major review into how Britain’s electricity market design could be reformed to enhance energy security and cut electricity costs for consumers.

A consultation launched today seeks to gauge industry views on changes to the wholesale electricity market that would stop volatile gas prices setting the price of electricity produced by much cheaper renewables.

On top of exploring reform to the UK’s marginal pricing system, the consultation also seeks views on introducing incentives for consumers to maximise their energy use at times when renewable energy is cheap and abundant, instead of at times of high demand on the electricity grid when costs are high and power is more likely to be generated from higher cost and high carbon resources.

In addition, the government is seeking views on reforming the market capacity to spur the roll out of low carbon flexibility technologies, such as electricity storage systems, that enable a cleaner and lower cost grid.

The consultation marks the first step of a comprehensive review of the electricity market promised by the government in the British Energy Security Strategy (BESS), which was published in the Spring in response to Russia’s invasion of Ukraine and soaring fossil gas prices.

The Review of Electricity Market Arrangements (REMA) was today billed by Ministers as the biggest energy market reform in a generation for the UK.

Launching the consultation this morning, Business Secretary Kwasi Kwarteng said he was confident the review would boost the UK’s energy independence from foreign markets and help ramp up clean energy supplies for future generations.

“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,” he said. “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.”

The Department for Business, Energy and Industrial Strategy (BEIS) said it would engage extensively with the energy sector to develop and assess options for reform over the coming months, before publishing an official response this winter. From there, it said it would then further develop, refine, and narrow down options for reform during 2022-2023, before delivering proposed reforms thereafter.

The REMA’s broader mission is to develop a “for-purpose” electricity market design whilst identifying and implementing the reforms needed to ensure electricity markets work for businesses, industry, and households, BEIS said.

This includes consulting on both the continued evolution and expansion of existing schemes, such as the Capacity Market and Contracts for Difference, and the introduction of more fundamental changes where needed to guarantee uninterrupted supply during periods of low wind or solar generation.

“Today’s launch of REMA is a major step in delivering a secure energy future for Britain, putting in place the electricity market design. We need to allow us to make the most of our world-leading diversity of power sources while offering more value for money for consumers,” said Energy Minister Greg Hands.

The move came as the industry association for the energy sector, EnergyUK, this morning published a report calling on the government to ensure any reform of the electricity market prioritised creating a “stable environment” for driving much-needed investment in clean energy infrastructure over the coming years.

This could be achieved by a rapid expansion in generation capacity, it said, including a continuing role for Contracts for Difference and Capacity Market mechanisms, but with “evolutionary changes” to ensure they remain fit for purpose.

It has urged Ministers to help create a more “dynamic” energy system that incentivises flexible technologies, and reform of the wholesale market to improve efficiency and minimise system costs. Incremental changes, such as to charging, could be introduced initially, EnergyUK said, while the case for longer-term reform such as locational pricing was being assessed.

Adam Berman, deputy director at EnergyUK, said that the design of the power market needed to be made “fit for a future where we need to meet a huge increase in the demand for electricity, reach ambitious energy security and climate change targets, and have the flexibility to get the maximum benefit from our low-cost renewable generation”.

It remains to be seen whether the new proposals put forward by BEIS are adopted by the incoming Prime Minister, after several candidates voted concerned over the pace of the UK’s net zero transition and highlighted the importance of continued investment in gas infrastructure. However, a number of candidates also signaled their support for reforms that could ensure wholesale prices are informed less by gas prices and are better able to take advantage of the cost savings offered by wind and solar assets.

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