Transitional arrangements for electricity market reform

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Transitional arrangements for electricity market reform

80% of respondents to the first REMA consultation agreed that current market arrangements would not deliver the change necessary to achieve Great Britain’s energy objectives. Zonal pricing was presented as a lead market reform option by the Department of Energy Security and Net Zero (DESNZ) that could save electricity consumers up to £60 billion by 2050. Incremental reforms would complicate market risks, delay necessary changes, and fail to significantly reduce consumer costs.

A shift to zonal pricing will affect revenues for both renewable and non-renewable assets, and for storage as well as generation, across Great Britain (Northern Ireland has separate electricity market arrangements), with potential winners and losers depending on where those projects are located across the country.

Energy Systems Catapult was commissioned by Octopus Energy to develop recommendations for how to protect investment while reforming the electricity market. This is a topic that could help build consensus for change, but which has received only limited attention from the government so far.

Key points:

  1. Electricity market reform is essential for meeting our energy objectives
  2. Getting the design of investment protection right is vital to facilitate a smooth transition to new market design and retain market confidence
  3. All protection options retain consumer benefits but there are reasons why simply providing blanket coverage would not be optimal
  4. We recommend maintaining the de-risking effect of CfDs and mitigating the impact of increased ‘volume risk’ (i.e. not being scheduled to generate as often), whilst exploring whether and how much price risk protection is necessary
  5. We recommend a stretching but realistic delivery timetable within this parliament

Next steps: 

We recommend that further work is undertaken to model the options we have identified to understand the impact on different project archetypes. This should elicit more precisely how much of protection is needed for different projects, and over what period, to ensure fair treatment of investors.

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