Summary of REMA update February 2025

Source: DESNEZ

DESNEZ hosted a webinar on 06 February 2025 to provide an update on the REMA process. This was the first update since December.

Timeline

The plan is to decide on which policy options will be implemented by mid-2025.

• The decision will be aligned with CfD AR7.

• New consultations will be launched toward the end of 2025 on how to implement the selected policy option best

• No final decision has been made so far.

National Pricing

REMA reforms would be in addition to the NESO reforms, and the following options are still under consideration:

• Reform of the TNUoS charges to send stronger locational signals and link the charges to the “planned” network build. —> This would mean that ofgem has to abandon their new “cap and floor” model.

• Incremental reform to the balancing arrangements in cooperation with NESO:

  • Reduce the settlement period duration

  • Introduce a less attractive last-minute imbalance price to make it less attractive to “game the system.”

  • “Physical notifications” must match traded positions

  • Incentivise market participants to “self-balance” when the system is tight

  • Lower the capacity threshold for assets to force more of them into the balancing market

  • Introduction of pay-as-cleared mechanism

  • Align gate closure and market trading deadline

• Only new storage assets can receive non-firm grid connections

• Make greater use of Strategic Planning

• Give NESO new tools to manage interconnector flows

Zonal Pricing

DESNEZ is considering this topic from a whole-system approach and would either introduce zonal pricing or choose to send location signals through TNUoS.

• DESNEZ is looking at the Nordics as an example of zonal pricing mechanisms

• Price zones would be set to match the actual transmission constraints in the GB Power market

• A day-ahead auction would be introduced for intra-zonal trading, with the available transmission capacity acting as a limit for how much can be traded

• Each price zone would have its own balancing market

• Financial Transmission Rights (FTRs):

  • FTR Obligations, the holder receives payment equal to the positive market price differential between the source and sink zones, but the holder is obliged to pay the price difference when the price differential is negative.

  • FTR Options, the holder receives payment equal to the positive market price differential between two areas, but the holder does not have to pay when the price differential is negative.

Legacy Contracts

DESNEZ is aware that all reforms would affect legacy contracts and assets and reforms will take several years to be implemented.

• CfD assets would be protected for the length of their remaining tenor

• A bespoke financial protection scheme is under consideration for other assets that would be a separate contract that has to take locational volume into account. This might require separate legislation for implementation, and it would be challenging to calculate the revenue impacts of the reforms.

• Policy decisions will influence the design of CfD AR7 to include potential risk mitigations

Second REMA consultation: Highlights

The second consultation of the Review of Electricity Market Arrangements (REMA) is open until 07 May 2024. It is part of a wider reform process in the UK to adapt the electricity system for a net-zero future.

The REMA process tries to find solutions for four fundamental problems:

• How do you address that the best wind resources are in the north, but most of the demand is in the south?

• How do you prevent price manipulations?

• How do you make sure that we have sufficient generation capacity?

• How should the government support new renewable energy projects?

Better locational price signals

Most demand is in the south of England, where there is limited room for new solar farms and onshore wind farms are effectively banned. As the existing transmission network has limited transport capacity, we can’t “ship” enough electricity from Scotland to England on windy days. This means that wind farms in the north have to curtail their production while expensive gas-fired power plants in the south are being used to meet the demand.

To solve this problem, you either need to:

1. build more electricity generation capacity in the south of England or

2. reduce the electricity demand through more efficiency or

3. you encourage companies to move their facilities to the north.

This can only be achieved if the electricity in the south is more expensive than in the north.

REMA is considering two alternatives:

1. Split the electricity market into different price zones along the transmission bottlenecks OR

2. Reform the existing transmission charges system by either

3. Using the existing ofgem network charges reform

4. Reviewing the transmission network access arrangements

5. Expanding constraint management

6. Optimising the use of cross-zonal interconnectors.

Central vs Self-Dispatch

Currently, it is up to each generator to decide how much electricity they want to feed into the grid/sell on the market. This system is called self-dispatch and is commonly used in Europe. This system can lead to two problems:

1. Too much electricity is produced, and prices fall or become negative.

2. Generators withhold their production to create an artificial shortage, and when prices spike, they start selling their production.

In some countries (like parts of the USA), central agencies decide who can sell what amounts of electricity at any given time. This is called a central dispatch system.

While the UK government is exploring the option to switch to a central dispatch system, it is unlikely to be introduced because of the high implementation costs. A reform of the existing self-dispatch system is more likely.

Capacity Market reform

The capacity market is another tool for the network operators to ensure that enough generation capacity is available at all times. Contracts are awarded through auctions.

As part of the reform process, the government is considering to introduce new minimum criteria in each auction:

• minimum capacity target per region

• minimum capacity target per technology

These auctions could be used to support the build-out of new generation in regions of high electricity demand and to support new technologies.

CfD Reform

The Contract for Difference (CfD) scheme has become an important tool to support the energy transition. The government wants to future-proof it to include options for new technologies and for retrofitting older wind or solar plants (re-powering).

The options under consideration are:

• Pay generators on deemed generation instead of the actual produced electricity. This would allow producers to reduce their output in times of oversupply without losing income.

• Pay generators a lower fixed amount for the capacity (per MW) and let them sell the electricity on the open market.

• Limit how many MW per plant can be submitted in the CfD auctions. The idea behind this proposal is to provide asset owners with a minimum amount of certain revenue while encouraging them at the same time to sell the rest of the production on the open electricity market.

• Review the formula for the calculation of the reference price.

Provide your feedback

If any of the abovementioned areas impact you or your business model, I encourage you to submit your feedback to the Department for Energy Security and Net Zero (DESNEZ) by 7 May 2024. You have the rare chance to influence the design of the electricity market for years to come.