We should all be pushing for radical reform of the electricity market

With the government imminently due to give its view on electricity market reform, Octopus Energy’s Rachel Fletcher sets out why locational pricing is the only solution that will unleash the potential of renewables, turbocharge flexibility and save consumers and businesses money.

The bonnet is up on electricity wholesale market arrangements, with the REMA (review of electricity market arrangements) team due to report “any time now”. But it’s already clear that the old banger is well and truly broken and it’s time for a new car.

Consider the current situation: Renewables are often built where there is little demand for their output, insufficient network capacity to carry it elsewhere, and are being paid billions not to run, wasting green electrons and extending our dependence on gas fired generation down south.

Meanwhile, valuable assets like interconnectors and batteries are creating problems for the system rather than supporting it. And the growing cost of all this dysfunctionality is passed onto customers, many of whom struggle to afford their bills.

No wonder some politicians harbour a suspicion that consumers are not receiving the full benefit of lower cost renewables.

To get to net zero quickly and cheaply new wholesale arrangements must:

1. Help connect renewable assets quickly and cheaply to the system by making better use of infrastructure already in place. To meet government’s targets, in the next six years we plan to build 5 times more transmission lines than we have done over the entirety of the last three decades.

We must certainly heed the Winser Report and take decisive action to reduce the grid connection queue and the 14 years it takes to build new transmission. But it would be foolish to assume we can simply build our way out of the mess we’re in. We have to question whether these transmission targets are physically achievable and look for ways to lighten the load through better use of existing infrastructure.

Here there is plenty of room for improvement, with the single GB wholesale price causing interconnectors to flow the wrong way for the system around 40% of the time – for example exporting power from the South where we need it the most. If new market arrangements could address this one problem, it is estimated we could take 20TWh of stress from the system, significantly denting the need for new transmission and a rough estimate saving of up to £8 billion.

2. Use consumer demand to operate a system dominated by renewables efficiently and securely. We have a growing opportunity to use the electrification of heat and transport for the efficient operation of the low carbon electricity system. The System Operator expects there to be up to 20GW of flexible consumer load by 2050 and projections from the Crowdflex trial suggest this could reach 7GW as soon as 2030. This new load will either add to system peak (with each GW costing roughly £1 billion) or, if used smartly, help get to net zero cheaply and with more resilience.

The technology already exists and is being used today to automate the charging of around 1GW of EV and heat pump load. Yet current market arrangements give a poor indication about where and when this flexibility is required, reducing the contribution this can make to balancing the system, solving constraints and displacing our reliance on high carbon assets.

3. Help industry benefit from cheap green power. With an abundance of renewable generation, the North of England and Scotland are estimated to have some of the cheapest power in Europe. Yet currently neither domestic nor industrial customers in those areas see the benefit. The opportunity to attract energy intensive producers (e.g. data centres, steel producers and electrolysers) into areas with excess renewables is being missed, at the expense of local industrial growth and jobs. Moreover, current market arrangements pass up an opportunity for new industry to use renewable output that will otherwise be constrained off.

Locational pricing is the only option on the table that can meet all these needs – it is the solution that alternatives must be judged against in terms of cost and carbon savings, and in making us less dependent on new transmission to achieve net zero.

Ofgem estimates it could bring prices down for customers in all parts of the country saving up to £52 billion or on average £120 p/a over 16 years. This does not include the very considerable network savings or the benefits that might come if areas with excess generation could attract industrial investment. With this included, we estimate savings could reach £80- £100 billion.

Any market reform must ensure that renewable investment remains commercially viable. Grandfathering of existing projects, and potentially higher CfD strike prices must be factored into the assessment. However, with potential savings of this scale there is more than enough money to keep investors whole – and smooth out regional differences in household bills if this is desired – and still have many billions to spare. Ofgem’s modelling (noting the substantial omissions above) suggests minimum net societal benefits of over £11 billion.

While people have different views on what a new market should look like, we should all be aligned on one thing – continuing with versions of the status quo is not sustainable. It could leave the industry, customers and the energy transition stranded and in grave danger, like the driver of a clapped out car in the fast lane of the M1. Anyone wanting a quick and affordable transition should be pushing for radical reform.