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ISSN 2753-7757 (Online)

UK launches biggest electricity market reform in a generation

27/7/2022

View inside a pylon looking up Photo: Shutterstock
The UK government has called for a review of the UK’s electricity market in what could be the biggest shake up of the sector in decades

Photo: Shutterstock

The UK government has launched a review of the country’s electricity market design in a bid to radically reduce the UK’s exposure to volatile global gas markets and cut energy costs for consumers.

In what could be the biggest electricity market shake up in decades, the Review of Electricity Market Arrangements (REMA) will seek views on a wide range of options to address the combined challenges of responding to higher global energy costs, the need to further boost energy security and move the UK to a cleaner energy system. It will cover wholesale markets, the balancing mechanism and ancillary services provision, as well as all policies with an impact on these, including the capacity market and Contracts for Difference (CfD) scheme.

 

Some of the changes being consulted on include:

  • Introducing incentives for consumers to draw energy from the grid at cheaper rates when demand is low or it is particularly sunny and windy, saving households money with cheaper rates.
  • Reforming the capacity market so that it increases the participation of low carbon flexibility technologies, such as electricity storage, that enable a cleaner, lower cost system.
  • De-coupling costly global fossil fuel prices from electricity produced by cheaper renewables, a step to help ensure consumers are seeing cheaper prices as a result of lower-cost clean energy sources.

 

Under the current system, gas prices often end up setting the wholesale electricity price, because it is often the last source of supply to meet demand. The ever-increasing participation of renewables in the system means over time, cheaper electricity produced by renewables energy will determine the price more often. This consultation will explore ways of updating this pricing system to further reflect the rise in cheaper renewable electricity – something that could have a direct impact on reducing energy costs, ensuring consumers reap the full benefits of the UK’s abundant supply of cheaper, cleaner energy, reports the UK government.

 

At the launch of the review, Business and Energy Secretary Kwasi Kwarteng said: ‘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. 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.’

 

The consultation launch forms part of the government’s comprehensive review of the electricity market, first announced in the British Energy Security Strategy (BESS). The BESS significantly raised ambitions for building low carbon and cheaper-to-run technologies such as offshore wind, solar and nuclear, as part of UK plans to deliver a clean and secure electricity system by 2035.

 

‘The electricity sector is in a period of profound change. The rapid expansion of low-cost renewables has created massive opportunities for decarbonising the sector whilst bringing with it the challenges of managing variability. Without sensible reforms to the power market, the UK will risk not achieving its climate and energy security targets,’ comments Adam Berman, Deputy Director, Energy UK. ‘We need to ensure that the design of the power market is 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. Crucially, any reforms need to ensure that the planned £100bn of industry investment this decade isn’t called into question. Reforms which lead to increases in the cost of investment, or investment delays, will make it harder to reach the government’s ambitious targets.’

 

With this in mind, Energy UK has published a new report on The future of the UK power market which stresses that significant increases in the demand for clean power over the coming decades will also require a stable environment to attract the necessary investment in infrastructure.

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