We have published our response to the Government’s Review of Electricity Market Arrangements (REMA), the most fundamental review in decades of how the system is set up.
What is the REMA?
The Department for Business, Energy & Industrial Strategy (BEIS) published the REMA in July 2022 in response to record wholesale prices in the UK, in the wake of the war in Ukraine.
The REMA asked for views on various wholesale market design principles, including whether zonal or nodal locational pricing should be introduced, where wholesale prices would vary dependent on location. Prices would also vary according to how much it costs to deliver electricity in various parts of the UK, taking into account factors such as electricity losses and network congestion.
Our views on the REMA’s key market design areas
- Split Markets/Green Power Pool: We believe a split market or green power pool will have negative distributional impacts on consumers. It is untested and will not bring forward as much flexible supply and demand. The Market-wide Half Hourly Settlement (MHHS) Programme and the continued roll out of smart meters will bring forward more flexibility, and extending the Contracts for Difference (CfD) scheme to other renewables is a better approach.
- Locational Pricing (Zonal and Nodal): There is a risk of reduced investment in renewables and disproportionate outcomes for inflexible consumers under either of these models. Our response includes potential mitigations of those risks so that if this route were chosen, a transition could be managed properly.
- Electricity Demand Reduction (EDR): We could facilitate a potential market for EDR, subject to the successful implementation of MHHS and the completion of the smart meter roll-out. We are supporting this through Modifications such as P375 ‘Settlement of Secondary BM Units using metering behind the site Boundary Point’ (implemented in June 2022) which makes it easier for smaller asset owners to provide services in the Balancing Mechanism (BM).
- Distribution-led Local Markets: We highlight the need for standardisation and convergence in Settlement and balancing methodologies for Distribution System Operators (DSOs) when developing local balancing markets. We also recommend that local markets should be developed incrementally. Modification P441 ‘Creation of Complex Site Classes’ helps with this. Finally, it would be beneficial to consider reform of Distribution Use of System (DUoS) tariffs when considering the development of local markets.
- Shorter Settlement Period and other parameters: We explain how shorter Settlement Periods have both advantages and disadvantages. Elexon has agile systems to adapt to such a change if it were considered as a preferred option.
- Deemed generation: Calculating deemed generation is difficult and complicated. A better method of reform could be adjusting ancillary service volumes, and making sure the metered data used in CfD Settlement includes power generated and used to charge a battery.
- Capacity Market: It would be beneficial to consider reforms to the Capacity Market (CM) such as increasing incentives for flexibility and new technologies, more robust performance assurance of parties holding capacity obligations obtained via secondary trading, and making the penalty regime less complex.
- Strategic Reserve: We support this, as diverse market and non-market methods of procurement could be available should a Stress Event occur. They would act as a back-stop if the capacity cannot be procured in the CM. It is also a sensible mechanism to enable the Future System Operator (FSO) to plan investment and prepare for different load scenarios.
- Supplier Obligation for Flexibility: This would increase costs for Suppliers and they are not best placed to deliver flexibility, given current market circumstances. Flexible generation and demand should be encouraged through a range of alternative mechanisms, including the CM, Demand Side Response (DSR) and co-location of renewable energy generation with storage.
- Centralised Reliability Options: This is an interesting idea in principle, as the Electricity System Operator (ESO) buys volumes at a strike price. However we recommend refining this approach by adding a ‘strike price adjustment’. This removes the need for complex penalty processes and calculations in the CM. It may also reduce the risk of arbitrage opportunities by those who set out to procure a balancing service contract as well as an Obligation at the same time.
- Contracts for Difference (CfD): CfDs could be reformed by implementing a maximum and minimum strike price, which could lead to optimisation. Current CfDs could be amended by increasing market exposure, and protecting future investment. This could be done by setting a minimum price that may effectively reduce price cannibalisation.
- See our response to the REMA in full
- Find out more about Modification P375
- Find out more about Modification P441