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:
build more electricity generation capacity in the south of England or
reduce the electricity demand through more efficiency or
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:
Split the electricity market into different price zones along the transmission bottlenecks OR
Reform the existing transmission charges system by either
Using the existing ofgem network charges reform
Reviewing the transmission network access arrangements
Expanding constraint management
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:
Too much electricity is produced, and prices fall or become negative.
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.