Rethinking Electricity Markets is an Energy Systems Catapult programme that began in 2019 to develop proposals to reform electricity markets so that they best enable innovative, efficient, whole energy system decarbonisation.

The right electricity market reforms and market mechanisms will bring forward innovation and investment in a more efficient mix of low carbon generation, network enhancements and flexibility.

The six key reforms from Rethinking Electricity Markets are:

1. Make electricity markets work more accurately in time and space by introducing Locational Pricing.
2. Phase out centralised contracting (CfDs & CM) by mid 2020s and replace with outcome-based policy mandates.
3. Evolve policy to support financial market development and contracting for investment.
4. Redesign innovation and early deployment support for immature technologies to avoid distorting markets.
5. Overhaul governance and role definitions for industry codes, system operation, data and digital interoperability.
6. Align electricity sector strategy, regulation and outcome-based policy mandates with the carbon budget cycle.

In July 2022, the UK Government launched a transformational review into Britain’s electricity market design, seeking 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.

What is Locational Pricing? Watch the video:

The Low Carbon Contracts Company (LCCC) is a Government owned entity established to be the counterpart to Contracts for Difference (CFDs), a subsidy scheme designed to encourage investment is renewable energy and other low carbon electricity under Electricity Market Reforms a decade ago.

LCCC commissioned Energy Systems Catapult to assess the impacts of current changes to policies, regulations and market rules – driven by new Net Zero carbon emission targets – on EMR. The interactions are two-way, with the EMR also significantly impacting other policies and markets, so the policy change analysis involved considerable complexity.

The LCCC (and sister organisation – the Electricity Settlements Company) apply two key guiding principles:

• Maintain investor confidence in the schemes
• Minimise costs to consumers

With enhanced awareness and improved foresight, the LCCC and Electricity Settlements Company can implement timely actions to adapt and minimise risks to their mission and the EMR policy.

The Markets, Policy and Regulation team at the Catapult undertook a systematic impact assessment of all sources of current changes to policies, regulations and market rules (e.g. strategies, plans, industry codes, policy mechanisms) that might impact the Capacity Market, CfDs, the LCCC and the Electricity Settlements Company. The project compiled a database of some 70 different changes and assessed them against a typology of 20 different impact types. The impact assessment involved analysis from two different perspectives:

• By impact type – such as scheme payments, volume or volatility of levies, costs for the EMR institutions, settlements, metering; and
• By policy/market categories – such as wholesale market, retail market, network regulation, innovation support policy and institutions.

The comprehensive analysis, with attention to collective impacts and interactions, made it possible to identify significant themes for LCCC and the Electricity Settlements Company to consider in managing change.

The Rethinking Decarbonisation Incentives project aimed to develop  a coherent set of interlocking sectoral instruments covering all emitting activities throughout the economy, with a linked market for greenhouse gas removals. Our approach involved:

• Working collaboratively with a range of stakeholders across government, industry, and academia.
• Taking a whole systems approach to developing solutions and undertaking high quality analysis by drawing on a range of Energy Systems Catapult expertise.

Current policies comprise of different taxes, subsidies, contracts and regulations, with incentives to cut carbon emissions varying widely across different sectors of the economy and rewards being generally much lower than it needs to be. This makes it very difficult to promote long-term investment and innovation. The Government has published a Clean Growth Strategy, but unlike other jurisdictions (e.g. California and Canada) there is relatively little strategic debate or commitment regarding:

• The economic drivers for decarbonisation,
• Creating an enduring framework for carbon reduction across the whole economy.

The Rethinking Decarbonisation Incentives project has shown that the UK can achieve a balanced economy-wide carbon policy framework to boost innovation and deliver clean growth, consistent with a Net Zero target in 2050.

This does not necessarily require relying on a single ambitious economy-wide instrument, such as a carbon tax or economy-wide trading system. Rather it is possible for the UK to develop a pathway towards more coherent incentives for emissions reduction across the energy system and the wider economy by developing a complementary mix of policies. Carbon standards offer potential to play a key role in this pathway.