Being serious about Net Zero means we need to find ways to progress reform - Tom Luff & George Day

Comment by Tom Luff, Senior Adviser – Policy and Regulation, and George Day, Senior Policy Adviser, at Energy Systems Catapult.

It’s nearly 18 months since BEIS (as it was then) launched the Review of Electricity Market Arrangements. Since then, much of the ensuing debate has focused on the pros and cons of moving to more locationally granular wholesale electricity markets – either through splitting the current national market into several zones, or going further to nodal (or ‘locational marginal’) pricing as is common in US and other markets around the world.

This has become quite a divisive debate – on the one hand advocates (and this includes Energy Systems Catapult) have argued that more granular prices can more accurately reflect the underlying physics and drive major benefits for consumers, while opponents (and this includes many generators and their investors) argue that change will drive up risk, cause disruption and delay necessary investment.

With hindsight it was always likely to be thus. Changes to locational pricing in electricity markets (or in network charging) have always been inherently controversial and difficult to introduce because they create winners and losers. And as is often the case for difficult reforms, future benefits that are widely dispersed appear less tangible than the downside impacts on a clear subset of interests. Then there is the well-known psychological phenomenon of ‘loss aversion’ where losses weigh more heavily than gains in human decision-making.

So while Ofgem has commissioned a thorough economic analysis which suggested sizeable consumer benefits, a number of other analyses by some of the best analytical brains around in the sector have emerged which come to quite different conclusions. We were part of the team on the Ofgem study and can vouch for the thoroughness of process used by FTI Consulting in assembling input assumptions and designing the analytical methodology, along with the transparency of process at several stakeholder workshops.


Figure 1: Breakdown of consumer surplus and welfare (£bn, Present Value 2025-40, Nodal, Leading the Way NOA7).

At Energy Systems Catapult we tend often to adopt a pro-reform stance in looking at energy policy challenges. This is because our work (especially our whole system analysis) shows us how ambitious we will need to be to deliver a Net Zero energy system. Our work shows how we need innovation not just in individual technologies, but also in “system integration” or how low carbon energy is combined and integrated into the broader system through smart control mechanisms, through contracting mechanisms and through consumer propositions.

But being pro-reform means that we must also be practical and take seriously the necessary process of transition to new policy and market frameworks that are better adapted for a Net Zero future. We need to take seriously the views of private investors, since we will need £billions of further investment. But that investment must be in the right mix of technologies and driven by system (and ultimately users’) needs.

It was this process of transition that was the subject of a recent discussion we hosted (and summarised in the note which you can download at the end of this blog). We enjoyed a rich discussion with a range of actors from across the sector – and while we deliberately didn’t seek to form a consensus about the precise design of the “right answer” for wholesale electricity markets, it did give some cause for optimism that the reform process itself is tractable and transition can be made workable.

There was broad acceptance that change is inevitable as we move to Net Zero, alongside very different views about what form this should take. However, our take from the discussion was that while there are clearly risks associated with change, skilful policy design and careful dialogue can help to manage these risks so that change becomes acceptable, and reforms can be implemented.

Our other take is that, if we are serious about delivering net zero in the real world, then arguments about disruption and risk can’t be blockers to necessary reform. Doing Net Zero is inherently disruptive – and we need to accept and manage this as we reform outdated arrangements and realign policies for a net zero future.

Easing the Transition to a Reformed Electricity Market

Workshop summary note: 24 August 2023 London

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