Electricity markets will serve as the foundation for the future GB energy system. This article examines some of the market design decisions that will be considered by the Review of Electricity Market Arrangements (REMA).
Market design goals
At its most simple, a well-functioning market will attract enough potential “buyers” and “sellers” to produce satisfactory results for both. Good market design will include mechanisms that allow participants to make decisions with confidence.
BEIS identified requirements for the transformation of the GB energy system by 2035.
- High investor confidence in low-carbon technologies
- System flexibility optimised for intermittent renewables and adaptable to emerging technologies
- On-time delivery with unintended minimal disruption, despite the complexity of the existing energy system
- All delivered at the lowest possible cost to consumers
The consultation published on 18 July 2022 describes a “whole-system approach” to reform. REMA will focus on the longer-term market arrangements needed to ensure supply security, cost-effectiveness, and decarbonisation.
The scope of REMA
The wholesale market, balancing mechanism, ancillary services, the current Contracts for Difference scheme, and the Capacity Market are all included in REMA. Non-electricity markets (such as hydrogen, gas, and carbon), retail markets, incentives for new technologies, interconnectors, and large-scale nuclear investment will generally be excluded from REMA’s focus.
Market design options
REMA is still in its early stages. The initial consultation period runs until 10 October 2022. Proposals are illustrative rather than exhaustive. Some concepts are still theoretical, or might not have been used in a system with GB’s features.
Here is a selection of options from the consultation.
- Splitting the wholesale market – moving from a single national wholesale price, to twin wholesale prices, splitting intermittent renewables from other generation types. This could reduce the impact of high marginal prices set by gas fuelled generation assets, with an intermittent renewables market treated like the historical “pool” perhaps managed by the Electricity System Operator (ESO).
- Move to pay as bid – an approach that could decouple prices from those that currently set the marginal price, typically gas fired stations. A “pay as clear” approach could limit the price that generator’s offer power into the market by basing it on their costs and not the marginal price.
- Introducing locational pricing – a single national wholesale price won’t incentivise sites to be developed where the electricity network can best support them. Introducing a more granular set of prices, each better reflecting the capacity and losses of the network at the point they apply, could act as an incentive when choosing locations for generator or consumer developments. Nodal pricing (locational marginal pricing, LMP) could introduce hundreds of pricing “nodes” across the country. Zonal pricing is somewhat a halfway house, removing some complexity by having a single price for regional zones, but which allows pricing of electricity flowing between zones to reflect the relative network constraints.
- Creating a new market for long-term response – existing wholesale and balancing markets reward frequent storage charging and discharging, and do not necessarily reward the system value of sustained response. New markets may be required to support long duration storage.
- Improved temporal pricing – there is value in continuously matching demand and supply across the system. Current market arrangements financially reward balance across 30 minute periods. Dampened signals undervalue flexible assets and limit suppliers’ ability to offer tariffs that encourage consumers to be flexible.
- Local, distribution network led markets – transmission network constraints could be reduced if suppliers were incentivised to source energy generation locally. Different options are suggested to achieve this.
- Carbon abatement auctions – instead of conducting auctions based on energy unit strike price (Contracts for Difference), auctions are run to maximise the impact of resources on reducing emissions.
- Reform of existing markets – rather than building new markets, incremental change may achieve the goals. Accompanied by widespread digitalisation of system-wide signals to better facilitate a very large number of smaller assets, rather than a handful of large generators.
Future market arrangements must provide the right signals for system flexibility and managing the variability of intermittent renewables. Consumers expect value for money, and investors need to be attracted to fund the required transformation.
These are ambitious goals, as evidenced by the extensive consultation, which is just the beginning of what could be a programme of change that runs for a number of years. Cornwall Insight is well-positioned to assist you in understanding the options presented. We can identify risks and opportunities, develop strategies, and inform consultation responses. If you want to learn more, please contact Kate Mulvany at k.mulvany@cornwall-insight.com
