Rethinking Electricity Markets

Introduction

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

We need to reform electricity markets and market mechanisms so that they bring forward innovation and investment in a more efficient mix of low carbon generation, network enhancements and flexibility.

In developing proposals to reform electricity markets, we will:

  • work collaboratively and interactively with a range of stakeholders with different perspectives and expertise
  • draw on our capabilities to analyse and understand the challenges of whole energy system decarbonisation
  • draw on our experience in working with innovators and local energy projects
  • share and test our emerging insights on a regular basis.

The Challenge and Opportunity

Low or zero carbon electricity will have a key role to play in achieving a net-zero greenhouse gas emissions target by 2050. New and renewable forms of electricity generation will be crucial within a more decentralised and flexible system, serving more of our transport and heat energy demands.

Current electricity market arrangements are complex and market mechanisms do not fully reflect the value of different technologies to the system as a whole – in terms of how they impact on overall system costs or reduce carbon emissions. The value of different technologies depends on:

  • how flexible and reliable they are
  • where they are located on the network
  • their impact on carbon emissions.

Current market arrangements make it difficult to promote a balance of investment across different times, locations and solutions or to encourage long-term investment choices and innovation.

Our Approach

Electricity sector policy reform is often focused on design details of particular mechanisms (e.g. network charging, auction mechanisms, capacity markets). There has been less focus on how these detailed mechanisms fit together to signal value, or on the strategic choices around how to ‘get prices right’ across the system and the value chain.

Rethinking Electricity Markets aims to fill this gap by  focusing attention on the options for reforming the current complex mix of market and policy arrangements so that they stimulate innovation and investment in a flexible and resilient mix of zero carbon electricity. This means addressing issues such as policy fragmentation, integration of electricity into the wider energy system (heat/ transport), and interaction between regulatory and policy instruments.  A key emerging theme is the need for more granular price signals in both time and space, to ensure that markets reward actors who deliver flexibility in locations where it is most valuable.

The project so far has delivered a first exploration of the strategic issues in electricity market design, drawing upon international experience with alternative market and regulatory architectures. Working alongside Poyry, the initial stages focused on the following questions:

  • How are the different sources of value in electricity markets reflected in the current GB market arrangements?
  • What is the risk that market signals will lead to distorted or inefficient outcomes?
  • What lessons can we learn from alternative market designs about practical solutions for a future set of market arrangements?

Our Outputs

The Rethinking Electricity Markets project and related work has so far produced:

Who is involved?

To date we have worked alongside Poyry for the delivery of the work. Through a series of events, we also benefited from feedback from stakeholders across industry, policy and regulation, including BEIS, Ofgem, CCC, DNOs, ESO, suppliers and technology developers.

Next Steps

We intend on developing this stream of work over the coming 1-2 years by leveraging ESC’s internal capabilities and working alongside our innovators network, wider industry and academia. Building on the work to date, the next stage of the project would likely focus on the following themes:

  • How can local markets and network charges work to support decarbonisation?
  • How can arrangements based on local markets and network charges approximate the functioning of locational marginal pricing in terms of reflecting the time and locational value of electricity?
  • What policy and regulatory framework would be needed for such a system to operate well to support innovation, enable efficient multi-vector choices, support efficient decision-making and make price formation more cost-reflective?
  • What roles do different actors need to play and how can they interact and coordinate effectively?

We will continue publishing insights on this webpage and will seek continuous stakeholder engagement, including via a potential creation of a strategic advisory group. If you are interested in collaborating with us, please contact the Markets, Policy and Regulation team: mpr@es.catatpult.org.uk