EMR 2.0: a new phase of innovation–friendly and consumer–focused electricity market design reform

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.

It is nearly 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 investment in low carbon generation 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.

While the EMR 1.0 policies have been successful in transforming the cost of renewables, the context has changed in important ways since they were first introduced, including:

• The new goal of Net Zero greenhouse gas emissions by 2050. Partly because of the success in cost reduction, this is likely to drive even higher penetrations of variable renewables, and an earlier role for electrification of transport and heat;
• the emergence of new system issues as a result of the rapid growth of variable renewables (e.g. a more variable and decentralised system makes the operational dimension of security of supply more important) which we know more about today compared with 2012; and
• the inability of demand-side response and storage (‘flexibility’) to keep pace with variable renewables growth, despite the availability of new technologies.

As part of the project, we worked alongside AFRY to:

• Identify and characterise key sources of value within electricity markets and how they are reflected in current GB arrangements,
• review approaches taken in other jurisdictions and identify the main strategic choices for GB electricity policy for improving market signals across time and space,
• consider how to strengthen the evidence base to inform decision-making about improving the coherence of the existing UK market framework.

Key points

There are five key challenges for a net zero electricity system, that place efforts to develop EMR 2.0 in a very different context to that which existed a decade ago.

The key risks of continuing to rely on EMR 1.0 policies and failing to introduce more fundamental market reforms include:

• 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
• failure to optimise the combination of technologies and resources, resulting ultimately in higher costs and less reliable service outcomes.

EMR 2.0: Six key reforms for a net zero electricity system