Ask any energy consumer right now and they’re unlikely to disagree that the UK’s electricity market is badly in need of reform.
As reported in a recent blog, soon-to-be-former PM Boris Johnson has called the current market “ludicrous” and is promising to “get rid” of a system that lets the price of gas dictate electricity costs, despite the UK now generating increasing volumes of cheap renewable power.
So when the Department of Business, Energy & Industrial Strategy (BEIS) released more details and a consultation on its Review of Electricity Market Arrangements (REMA) on Monday (18 July), it couldn’t have come at a better time.
Biggest change in a generation
As well as looking at the best way to curb current high electricity prices, REMA’s aim is to establish the best market arrangements needed to deliver a fully decarbonised electricity system by 2035 – and to achieve this without compromising security of supply and at the least cost to consumers.
It’s an ambitious plan designed to bring about the “biggest change in a generation” and is considering options spanning from “evolution” to “revolution”.
For example, rather than having a universal wholesale price for power, costs could vary according to proximity to generation assets such as wind farms, nuclear power stations or battery storage.
The idea to move to a location-based market has been put forward by National Grid, as part of its recommendations in its recent Net Zero Market Reform report.
Demand side response prioritised
REMA is also proposing to incentivise greater consumer flexibility and opportunities to participate in helping to balance supply and demand.
This will be welcome news to businesses with demand-side response (DSR) capability, as well as flexibility providers, especially since Ofgem is abolishing the current Triad system from April 2023 (via its Targeted Charging Review), which reduces around 2 GWh of peak winter electricity demand.
Electricity demand set to double
BEIS estimates that demand for electricity is set to at least double over the next 13 years, as the number of electric heat pumps and electric vehicles grows.
More than 10GW of new capacity will therefore need to be built annually between now and 2050 to meet this need.
So finding ways to firstly incentivise investment and secondly, balance increasing demand with growing levels of intermittent renewable supply will be key.
Achieving this at reasonable cost is also important, especially as balancing costs (Balancing Services Use of System or BSUoS charges) have rocketed recently and are set to at least treble over the next five years.
Steady market before wider transition
In terms of timescales, a possible pathway hinted at by BEIS in the consultation is to resolve the most pressing concerns initially (i.e. the current high prices), and only undertake transformational reforms once a more ‘steady state’ market has been reached.
Investor confidence has been highlighted as a major concern, so ensuring a clear pathway for the transition from existing arrangements is in place will help to provide more certainty for investment.
You can read the REMA consultation in full to learn more about BEIS’s thinking and proposals for consideration. This is open for feedback until 10 October.
But we will also bring you more information and canvass views as we develop our response on behalf of customers.
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