Scrap ‘revolutionary’ wholesale reform, renewables body urges

The government has been urged to steer clear of a “revolutionary” overhaul of the wholesale electricity market but build instead on existing mechanisms, like Contracts for Difference (CfDs).

In a new report, the REA (Association for Renewable Energy and Clean Technology) expresses concern that some of the radical options in the government’s Review of Electricity Market Arrangements (REMA) could damage confidence amongst developers and investors.

“They risk creating unnecessary market complexity as well as delays to the energy transition as time is taken to implement and regulate new arrangements,” the report states.

“New market arrangements must be implemented in a way that speeds up, rather than hinders ongoing decarbonisation of the electricity system.”

In order to reduce the uncertainty already sparked by the REMA process, the report says final decisions about it should be implemented in a “gradual predictable fashion”.

It adds: “Rather than creating new and untested structures, it is more effective to evolve existing mechanisms like the Contracts for Difference (CfD) and Capacity Market, which developers and financiers are already accustomed to.”

The report recommends adopting a more “evolutionary approach” than some of the those being proposed in REMA, such as splitting the wholesale market into renewable and fossil fuel generation in order to capitalise on the lower prices offered by the former.

Instead, the report recommends changes to the CfD and Capacity Market in order to realise the ambitions of REMA, which is designed to address problems caused by current arrangements whereby the wholesale electricity clearing price is based on the marginal cost set by the last generator that turns on to meet demand.

These recommendations include offering a premium in contracts to low carbon projects, which are able to guarantee a “specified quantity of electricity or energy supply at a fixed price for a defined period”, such as biomass projects.

The report calls for the government to abandon proposals in the REMA to split the wholesale market on the grounds that an absence of unlimited grid capacity will lead to “unnecessary reinforcement costs, unnecessary flexibility costs and/or load curtailment”.

But it says that proposals in REMA for more localised wholesale electricity pricing, which is the recommendation in the government’s consultation that has provoked the strongest backlash from the industry, should continue to be considered.

Dr Chris Harris, the report’s author and senior industrial fellow in sustainable power distribution at the University of Bath, said: “The Government’s Review of Electricity Market Arrangements needs to develop a wholesale market that both promotes the use of low carbon affordable domestic generation and ensures high levels of grid security.

“To do this, the future wholesale market needs to better reward both flexibility and firmness. This means that energy market stakeholders are rewarded for their abilities to quickly respond to changes in variable renewable generation or electricity demand, while generators are also rewarded for being able to commit to contracts that guarantee energy in a defined period at a secure price, to lower energy bills.

“This is best done by evolving our existing market arrangements, including the Contracts for Difference and Capacity Market Mechanisms, building on what developers and investors already trust, rather than trying to completely redesign the market at a time when the UK needs to be rapidly speeding ahead with its energy transition.”