All change for the UK electricity market – An analysis of the UK government’s REMA consultation

If you are a generator, network operator, offtaker, supplier, or consumer in the electricity sector, or are funding electricity projects in the UK, your business model will be impacted by the government’s proposed policy reforms set out in its recently published Review of Electricity Markets (REMA) consultation paper. The fallout of the Covid pandemic and the Russia-Ukraine war has caused energy prices to soar uncontrollably – and this has highlighted the need for a redesign of the UK’s electricity market. In July of this year, the government published its consultation on its review of the electricity market arrangements. The electricity wholesale market, the balancing mechanism, the provision of ancillary services, the CFD scheme, and the Capacity Market scheme (amongst other things) are now under review to see how our reliance on fossil fuels can be reduced, low carbon technologies scaled up and how we can make more efficient use of energy. It is clear that the policy proposals being considered by the REMA consultation will, in the future, fundamentally redesign our electricity market and impact all electricity industry participants.

What is being considered under the consultation?

• Splitting the wholesale market into an “as available” renewables market and a firm “on demand” market, with different pricing regimes for each of these markets all aimed at decoupling gas prices from renewable energy projects, and, consequently, reducing energy bills.

• System Operator managing a pool for renewable power, which would operate alongside the existing wholesale market – with renewable generators contracting with the system operator to sell their power into the pool and customers contracts to purchase electricity from the pool.

• Changes to electricity wholesale market pricing to reflect different electricity prices for different locations or zones in the transmission network, so as to encourage users to produce or consume electricity in a way that benefits the system as a whole.

• Possible move from self-dispatch by generators to central dispatch by the system operator.

• Development of an electricity demand reduction scheme.

• Establishment of local, distribution markets, so as to incentivise suppliers to source power locally, rather than nationally, to reduce network constraints with DNOs responsible for balancing the local market and ensuring its operability or local markets being run by smart energy service providers.

• An obligation on electricity suppliers to procure green electricity directly, on behalf of their customers.

• Reform of the CFD scheme – e.g. changing the strike price to a strike price range where:
  • renewable generators are guaranteed a maximum and minimum price per MWH output;
  • renewable generators being allowed to earn revenue between a specified floor amount and capped amount; and
  • making amendments to reward deemed generation, as opposed to actual generation, so as to incentivise renewables to provide ancillary services or demand side response.

• Reform of the Capacity Market Scheme – e.g. using differentiated prices depending on capacity types e.g. different price for low carbon generation, new build generation etc.;
  • running a specific capacity auction for low carbon technologies;
  • establishing auctions by a central authority to ensure additional capacity is available during peak times;
  • ensuring that the system operator, in times of scarcity, is able to buy electricity from assets in the wholesale market at a pre-determined price including from renewables and DSR;
  • obligating suppliers to secure capacity directly from capacity providers to meet their customers’ demands;
  • establishing a centrally co-ordinated tender process as regards the construction of new capacity;
  • incentivising capacity providers to provide ancillary services; and
  • implementing an equivalent firm power auction scheme where renewables, flexible assets and firm capacity compete for capacity contracts based on equivalent firm power.

We’re here to help electricity market participants navigate the changing regulatory landscape flowing from any REMA policy reforms in the context of their commercial concerns and objectives.