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Electricity Market Reform

Policy drivers for decarbonisation

The least cost pathway for decarbonising the economy requires significant reductions in carbon dioxide emissions from the electricity sector over the next two decades. Electricity market design and the associated policy framework must ensure that this transformation happens in a way that is cost-effective and maintains security of supply. It is not surprising that electricity markets that were designed 1-2 decades ago have proved inadequate in the face of this new challenge and many jurisdictions are now contemplating fundamental market reform.

The UK was one of the first countries to recognise the need for electricity market reform (EMR) and the Government has been working on the reform process for over 3 years. Throughout this period E3G has been closely involved, helping to set the agenda and propose solutions on the way forward. Two issues have emerged as critical success factors for the markets of the future: diversification, delivered through a technology deployment policy and market integration, and the demand side of the market, both in terms of demand reduction and demand response.

The precise solutions that are adopted in the UK are not necessarily appropriate to all market situations. Nevertheless, the basic challenge remain the same – where and how to strike the balance between centralised administration of outcomes and the unfettered behaviour of markets – and the thinking that has been necessary in the UK is relevant everywhere.

E3G will continue to hold the UK Government to account to ensure that EMR is implemented in a way that is truly fit for purpose. Moreover, E3G will look to take the knowledge gained in the UK to support thinking in other markets. Although focus will be primarily on European markets and the implications for the internal energy market, the lessons are relevant elsewhere, including countries that are critical for the decarbonisation challenge such as China.