It is a decade since the UK Government began to implement its Electricity Market Reform (EMR 1.0) including major mechanisms such as Contracts for Difference (CfD) to support low carbon investment and a new Capacity Market (CM) to ensure resource adequacy.

These kickstarted the rapid decarbonisation of the GB electricity system and drove extraordinary innovation and cost reduction,  especially in offshore wind.

However, the context has changed in important ways since they were first introduced. The new goal of Net Zero greenhouse gas emissions by 2050 will drive even higher penetrations of variable renewables, and an earlier role for electrification of transport and heat.

New system issues have emerged as a result of the rapid growth of variable renewables which we know more about today compared with 2012. Additionally, demand-side response and storage (‘flexibility’) has not kept pace with variable renewables growth, despite the
availability of new technologies.

There are a number of key risks associated with continuing to rely on the Government’s existing centralised contracting policies:

• Failure to unlock sufficient flexibility, particularly on the demand side, and to bring forward consumer-friendly service innovation
• A perpetual reliance on government decision-making to drive technology choices
• Less effective integration of zero-carbon electricity with other low carbon energy vectors
• Stifling great innovators and failing to optimise the combination of technologies and resources, resulting in higher costs and less reliable service outcomes.

Key points

We welcome the announcement by BEIS of a Review of Electricity Market Arrangement (REMA) but the pace of change must be made more rapid. The six key reforms set out below include a detailed set of linked policy steps and actions, all of which may take several years
to implement in full and as such should start without delay.

Our major report, Rethinking Electricity Markets, sets out the case for ambitious market reforms – focusing on the importance of more dynamic and granular wholesale market signals, and a move from centralised contracting (CfDs & CM) to outcome-based policy
mandates. Our proposals are based around six key reforms:

1. Make electricity markets work more accurately in time and space by introducing more efficient, dynamic and granular market signals in the short-term wholesale markets.
2. Phase out centralised contracting (CfDs & CM) by mid 2020s and replace with outcome-based policy mandates on market participants.
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.