Location, location, location: Reforming wholesale electricity markets to meet Net Zero

Energy policy has never been more important. Surging prices and the war in Ukraine remind us of how central energy is to our cost of living, economic competitiveness and national security.

Clean electricity will increasingly come to dominate our net zero energy system. We will need to invest hundreds of billions of pounds to build the net zero electricity grid.

But our wholesale electricity markets were designed for a different age, with a single wholesale price driving investment and operation of the system across England, Wales and Scotland. This is increasingly out of step with reality in a system that is being transformed.

We need to reform wholesale electricity markets

The clean electricity system will form the centrepiece of our strategy for achieving net zero. We can reform wholesale electricity markets to make prices reflect the true balance between supply and demand in real time across the grid. Other countries, including many markets across North America, have successfully introduced this approach.

This reform can unlock major benefits for the GB market as we move to a fully decarbonised grid that is more flexible, secure and affordable.

If we fail to reform, we risk spiralling costs to balance the system, and spending billions of pounds of customers’ money on generation and new transmission wires that are poorly located and adapted to our needs. We will have less innovation and more expensive energy for decades ahead.

Key points

This study commissioned by Octopus Energy shows that reforms to make wholesale electricity markets reflect local conditions could save around £3bn per annum on average (circa £30bn in total) by 2035, as the UK transitions to a net zero grid.

The results of the study align well with National Grid Electricity System Operator’s Net Zero Market Reform project, which recommends introducing dynamic real-time locational pricing.

Such reforms would align price signals more closely with physical reality, improving incentives to build the right assets in the right places, and for innovation to make both supply and demand more flexible.

Reform needs to be prioritised and actioned at pace

The UK commitment to decarbonise electricity by 2035 is laudably ambitious and makes market reform an urgent priority. Delay implies hardwiring inefficiency into the transition and inhibiting the emergence of a more flexible and balanced system.

Both BEIS (through the Review of Electricity Market Arrangements announced in the Energy Security Strategy) and Ofgem (through its analysis of locational pricing) are now starting important work to assess potential reforms in more detail.

Thereafter, implementing meaningful reform will require strong backing from Government, with the resources required to implement at pace.

Read the Report

Location, location, location: Reforming wholesale electricity markets to meet Net Zero

Rethinking Electricity Markets

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

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