REMA creating low carbon investment ‘hiatus’

Uncertainty bred by the review of electricity market arrangements (REMA) is creating a hiatus in low carbon generation investment, which will get worse the longer it continues, industry figures have warned.

A string of warnings about threats to investment caused by the government’s radical proposals to break up the wholesale market were issued during a Westminster Forum conference on REMA.

After consulting on a wide-ranging set of reforms last summer, the Department for Energy Security and Net Zero recently announced that it was taking some reform proposals off the table but continuing to consider the bulk of them.

Kate Turner, policy and regulation director at Scottish Power Renewables, warned against rushed reform to the system through REMA.

She said: “Incremental reforms to existing market mechanisms should be considered ahead of more radical disruptive reform.

“We should not risk a rush to implement reforms, which require careful consideration and the success of the CfD (Contracts for Difference) and the capacity market to date should certainly not be overlooked.”

Locational marginal pricing (LMP), which break up the national wholesale market into local nodes or zones, is “one of the more controversial” proposals being considered, Turner said: “The most significant risk of locational marginal pricing is that it diverts focus and the ability to achieve the 2035 and net zero targets. It risks taking time and resources and will take many years to implement.

“We need to make sure that we don’t undermine the mechanisms that we’ve got at the moment that secure low carbon generation through the CfD and the capacity market.”

Kate Mulvany, senior consultant at consultancy Cornwall Insight, said: “The longer all of these options remain on the table, the more difficult it is to maintain investor confidence and the hiatus risks becoming a permanent depression in investors choosing to invest in GB.”

Lack of policy certainty is affecting forecast revenue streams, potentially impeding development of new assets, she said, adding that REMA is already damaging some investors’ confidence due to the perceived risk that it will create “stranded” assets.

Mulvany added that suggested reform could mean viable schemes become unviable.

However Ben Shafran, head of markets, policy & regulation at Energy Systems Catapult, said there is “no evidence”  where LMP has been introduced that it has driven an investment hiatus.

“Continuing to use centralised contracting, when we’re trying to solve a system integration problem is a bit like trying to use a rotary dial phone to log on to Twitter: it does doesn’t really make sense. At the catapult, we see the locational marginal pricing as the foundation of reforms that would address that system integration challenge.”

Shafran was backed up by Cian McLeavey-Reville, senior manager at National Grid ESO.

“The current market simply doesn’t work in a net zero system and must be reformed. Of course, it’s not a simple fix and reforming the market to introduce locational signals isn’t an overnight job.

“It’s a major reform that will take time and cause disruption and uncertainty but we don’t see a viable alternative to fixing these problems and we need to consider that this is the market that will see us through not just to 2035 but 2050. It’s not a theoretical or academic idea.”