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

REMA: Nodal or Zonal Pricing?

REMA and the coming changes of the UK electricity market

The energy transition brings significant changes that require rethinking the rules of the electricity market. That is why the UK government launched the Review of Electricity Market Arrangements (REMA) consultation process.

The UK currently faces a problem: Scottish wind parks are producing the cheapest renewable energy. But the majority of the demand sits in Southern England. And there are not enough transmission lines to transport all the electricity produced in Scotland to England. To match supply and demand, you must curtail (limit) the amount of electricity produced in the North and use expensive fossil fuel generators in the South.

Therefore, one question being asked is whether having a single electricity price across the whole of Great Britain (Northern Ireland is in a joint market with the Republic of Ireland) is still the best option in this situation.

What is Locational Pricing?

Currently, people pay the same price for each electron whether it is being produced in Kent, in the Midlands or off the Scottish coast.

A result of REMA could be that Great Britain gets split into multiple markets to send stronger price signals and to balance the market better:

• If you have lots of demand in one market, prices would increase, incentivising people to consume less or at different times.

• If a lot of electricity is produced in another market, prices would fall (oversupply), and generators would be incentivised to reduce production.

Over the long term, energy-intensive industries would ideally move into markets with cheaper prices. And investors would build more generators in markets with high prices.

Electricity markets can be organised around Nodes or Zones.

What is Nodal Pricing?

According to ofgem (the UK regulator), a node is a single point in the network where wires/cables meet. This could be the substation where a generator connects to the local network. Or where the local electricity lines connect to the wider transmission network.

And each of these connection points would have its own electricity price.

Several countries/regions worldwide use this model, notably Texas, California, New England, Singapore and New Zealand.

The problem with Nodal pricing is that you create tens of thousands of tiny “markets” across the network. And each market has only a few generators and consumers. Therefore, the normal price-setting mechanism through the market doesn’t work in this case.

As a result, you need to introduce a central dispatch system and abolish the intra-day market. The sole responsibility for balancing supply and demand lies with the system operator in a nodal pricing model.

What is Zonal Pricing?

Price zones can be drawn up in different ways. Often, they follow geographic dividing lines or bottlenecks in the transmission network (interconnections between regions).

Within Europe, Norway, Sweden, Denmark and Italy have already split their countries into different price zones.

Source: Wikipedia

As long as the zones are big enough (i.e. enough market participants), electricity prices tend to be more stable and predictable than nodal prices. Consumers and generators can help the system operator balance the network through an intra-day market.

However, you will need some form of locational hedge or financial instrument for PPAs if the generator and the consumer are not in the same price zone.

Closing thoughts

The next government communication regarding REMA is due before Christmas, and industry insiders expect that we will get some additional information regarding the potential introduction of locational pricing.

It would take several years to introduce nodal or zonal electricity markets. Not only would you need to update all the laws and regulations, but also test the system thoroughly before switching away from the current model. We can’t afford disruptions in the flow of electricity.

It will not be a quick fix for the current problems of congested transmission lines and long waiting times for new grid connections.

But splitting the British market into several price zones would create enough pressure to incentivise :

• the build-out of new transmission lines (because people in the South will be angry with politicians due to higher prices) and

• drive the adoption of demand-side responses (smart meters, load shifting, etc.) from consumers.

One open question will be how to integrate legacy PPAs into this new market. The previously agreed price could be significantly lower or higher than a future locational price. Who will carry the financial burden or benefit from these old contracts?