REMA | Nodal pricing and market decoupling officially ruled out

The government has officially scrapped proposals to introduce hyper-local power pricing and has also ruled out a new wholesale electricity market for low carbon generation.

Energy secretary Claire Coutinho will announce the moves as she launches the second consultation exercise in the government’s long-delayed review of electricity market arrangements (REMA) today (12 March).

This latest paper further narrows down the options initially outlined in the first REMA consultation exercise, which was carried out in 2022.

As previously revealed by Utility Week, the paper rules out replacing the existing national wholesale power market with a plethora of nodal prices better designed to reflect the costs of generating and distributing electricity in different localities across the UK.

Instead the paper moots two options. One is the zonal nodal version of local marginal pricing (LMP) based on areas not yet geographically defined but larger than nodes.

The other option is reforms of network tariffs, like Ofgem’s Transmission Network Use of System regime, to provide end users with better locational signals about electricity costs. The interconnectors and the system operator’s balancing markets are other mechanisms that will be examined as part of this exercise.

However, it will be up to ministers to decide whether any price savings or increases resulting from more tailored locational pricing are passed onto consumers.

As also previously reported in Utility Week, the latest phase of REMA will rule out moves to split up the wholesale market into separate pools for low carbon and potentially more expensive fossil fuel technologies.

The Department for Energy Security and Net Zero saw risks that traders could arbitrage the two power wholesale markets resulting in no financial benefit for consumers from the lower prices on offer from low carbon generation.

The paper also rules out local balancing of wholesale markets, opting to retain the existing nation-wide arrangements.

Additional proposals to offer greater price exposure within Contracts for Difference is also not being taken forward in the latest consultation exercise.

In addition, the government has said that mechanisms will be created to allow the delivery of new gas power plants, which the Climate Change Committee has advised will be required even after the transition to a net zero emissions grid in order to cope with troughs in intermittent wind and solar generation.

Following the latest consultation, the government aims to finalise the REMA programme within the next year.

Responding to the latest REMA consultation, Greg Jackson, CEO and founder of Octopus Energy, said: “Our ridiculously distorted energy market forces us to send electricity to France when we need it most and pay a premium to buy it back from Norway, all while paying Scottish wind farms to switch off.

“With locational pricing, customers will save hundreds of pounds a year on bills and parts of the UK will see the lowest electricity prices in Europe, attracting new industry and reducing the need for new pylons.

“It’s right that the government is progressing zonal pricing and the energy sector must now work together to get this up and running swiftly so we can attract new industries – from data centres to manufacturing – and customers can benefit from cheaper electricity fast.”

Guy Newey, CEO at Energy Systems Catapult, added: “It is increasingly clear that the only way we can get to a net zero electricity system in time and without pushing up bills is to move to a market that reflects local supply and demand.

“It is an essential step forward to see government proposing stronger locational signals in the wholesale market through zonal pricing and a strong push for a smarter energy system. While it is disappointing to see nodal pricing ruled out, improved locational signals will deliver significant benefits to consumers and opportunities for innovators.

“The growing importance of electricity in the economy means security of supply is an essential partner of decarbonisation. Achieving security of supply means the rapid build-out of a raft of clean technologies as well as making our system as flexible as possible.

“And depending on how quickly we can build new renewables, nuclear, and other important technologies like Bioenergy Carbon Capture and Storage, it is also likely to require an ongoing role for rarely-used gas power plants to ensure security of supply in extreme weather events.”