This is E3G’s response to the Review of Electricity Market Arrangements consultation, closing on the 10th of October 2022. For more of E3G’s work on how legislation, policies and processes can fit together to form an effective power sector decarbonisation plan, read our recent briefing on power system change.
The REMA process must define:
- The long-term objectives for markets: Reinforcing the enduring requirement for markets to support least cost use of resources throughout the decarbonisation journey and beyond.
- The way the design evolves towards this vision: Establishing a market operator function to define the reform agenda using input from system operators and system users.
Changes that can be put in place that represent steps in the right direction: focus now on deployment of measures to support efficient consumption and reallocate costs to protect consumers from high prices.
Marginal pricing must sit at the heart of the long-term vision for electricity markets – it is difficult to imagine a credible alternative to manage a dynamic, decentralised system. However, it is also of paramount importance that consumers are insulated from excessive electricity costs. This should be achieved in a way that allows the market to return to clearing at marginal prices as soon as the impact of gas prices on electricity costs reduces to acceptable levels.
In a highly decentralised electricity grid with millions of renewable generators and electrified heat and transport it will be critical to balance the power system at a much more granular level in time and space. System operators can only ensure efficient use of resources by using more granular marginal prices – prioritising supply-side measures over demand-side flexibility is not sustainable. Mechanisms can be introduced alongside more granular pricing to reduce revenue risks for investors and protect consumers from high prices. There is significant learning that can be adopted from such approaches in the USA and New Zealand.
Reform on market mechanisms should go hand in hand with parallel workstreams in Ofgem to ensure regulated monopolies are adequately incentivised to adapt to a digitalised future, and support and embed innovative practices.
Any future electricity market design should encourage the energy industry to adopt a more holistic and whole systems approach – e.g. realising opportunities such as storage of heat instead of electricity in district heat networks or encouraging permanent reduction of energy consumption through energy efficiency improvements in the built environment.