The 129 page BEIS consultation, Review of Electricity Market Arrangements (REMA) is the first stage in what may be one of the most significant reforms in electricity markets since privatisation. Describing REMA as the biggest electricity market reform in a generation, BEIS’ stated ambition is, “to establish an enduring regime which overcomes the structural issues in the UK’s current and future markets, and ensures that households, businesses and industry – as well as the climate – reap the full rewards of the energy transition”.
The last major reforms to Great Britain’s electricity trading arrangements took place in two stages. The lights stayed on, but each stage brought differing outcomes for investors.
- In 2001 NETA, (New Electricity Trading Arrangements) introduced the current self-dispatch and balancing mechanism model in England and Wales. NETA rewarded flexibility. The consequences were profound, the drop in revenues for inflexible nuclear power stations contributed to British Energy’s insolvency.
- In April 2005 BETTA, (British Electricity and Trading Arrangements), extended the England and Wales trading and transmission arrangements to Scotland. Full access of Scottish generation to a GB wide market has been critical for the growth in renewables and decarbonisation of the GB electricity industry. The lights stayed on, investors made returns, and our electricity supply became much greener.
REMA picks up where these reforms left off, aiming to incentivise reliability, flexibility and decarbonisation. We need new forms of flexibility and reliability, which currently comes from unabated gas generation, incompatible with minimising costs, energy security and net zero. The challenge is that many of the replacements are not, yet, able to come to market without support and need technological development. Support for immature technologies, such as CCUS, and for large-scale nuclear are beyond the scope of REMA, but it will consider how they participate in electricity markets.
BEIS have not settled on one option for reform. BEIS sets out a wide range of potential reforms. The objective is to select an “optimal” package from this set of options. The options are radical.
- Wholesale market options include nodal markets, with very local power prices, regional markets, and distribution led markets. Each option is complex and will take a lot of work to implement. Just as with NETA and BETTA, the underlying business and IT system changes will be complicated, risky, and take a lot of time to identify, design and implement.
- Options for renewables focus on long-term contracts. This appears, at first sight, to be “evolution not revolution,” but options include fundamental changes e.g. a cap and floor regime, which could increase investor uncertainty and costs to consumers.
The scope of reforms is much wider than NETA and BETTA, and are taking place against a much more volatile background. The risks of getting it wrong are much greater. Investors will need to watch these reforms carefully; they could materially change the value of existing investments and the prospects of future investments. They will also carry very material operational risks.
It seems that the target for introduction of the reforms is 2025-2027, although timing is unclear.
Chapter 4 of the paper discusses “cross-cutting questions” about the role of the market, decentralisation and who makes decisions, the role of marginal pricing and how consumers can be encouraged to react to more granular price signals, whilst protecting consumers at the same time. The discussion shows that BEIS will have to make a series of choices, with winners and losers, including for energy consumers and investors. The underlying point is that these reforms could become politically controversial.
The paper is significant for what it does not cover as well. It is clear from the paper that domestic consumers have a significant part to play and these changes will have a significant consumer impact. As an example if local wholesale energy pricing is introduced, some consumers will likely see sharp rises in bills. These reforms could become politically very difficult. It is clear too that energy suppliers will likely have a central role. These are topics for another BEIS workstream, an “energy retail review”, which is “separate but interlinked”. There is little detail about this review yet.
The paper also references the wider energy system reforms (many of which are being progressed via the recently introduced Energy Bill), such as digitalisation, planning, network regulation, system governance and the development of carbon, gas and hydrogen markets which, whilst out of scope of REMA, will be considered throughout the review to ensure electricity and energy systems work effectively together, with incentives aligned to deliver BEIS’ overall objectives.
Given the central role of consumers and retailers and the inter-connectedness of the electricity and energy systems, we need to see the full package developed before we understand how the reforms will really work. There is, therefore, a long way to go on these reforms.
To learn more about the recently introduced Energy Security Bill, click here.