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Electricity Market Reform: Unfinished Business

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The previous Government put much effort into introducing an Energy Act that significantly changed Great Britain's electricity market. There is now a danger that ‘reform fatigue’ will deter the new Government from contemplating the need for further reform. However, it would be a mistake for the UK’s new Secretary of State for Energy and Climate Change, Amber Rudd MP, to think that all the issues are settled.

Few observers would argue that the current system is adequate to address future energy policy challenges. The market arrangements place a high cost burden on consumers and may fail to deliver a resilient power system. It will be difficult to correct these failings through small adjustments to market rules.

Instead, it will be necessary for the new Secretary of State to bite the bullet and identify the priority actions that will help put policy delivery back on course. This paper recommends three key issues to tackle:

  • Developing demand side markets – through introducing market reforms that clearly expose the value of demand response.
  • Accelerating regional integration within the EU energy market – through institutional change at policy, regulatory and operational levels.
  • Reviewing policy delivery mechanisms – through replacing existing market-wide schemes such as the capacity mechanism and carbon price support with targeted mechanisms such as emissions performance standards and contracts to procure flexible system capacity and renewable energy.

Implementing this policy agenda will not be easy. To progress each area will require some bold policy initiatives – in some cases challenging the conventional wisdom that has developed over a number of years. This agenda represents a major opportunity for the new Secretary of State and has the potential to significantly reduce costs and improve the robustness of policy delivery. Ultimately these issues will need to be addressed but, the sooner government rises to the challenge, the greater the benefits will be.

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