The Department for Energy Security & Net Zero responds to the REMA Consultation

In March 2023 the Department for Energy Security & Net Zero (“DESNZ”) published a summary of the responses (the “Consultation Response”) to the REMA Consultation (which we previously discussed here (the “REMA Consultation”).

Overall, the Consultation Response shows a general consensus among respondents on the need for market reform, and overall agreement that the current market arrangements are inadequate for achieving Net Zero by 2035. However, the picture beyond such high-level principles is much more mixed. Indeed, those hoping to have gained clarity from the outcome of the REMA Consultation may be disappointed: there is no clear winner amongst the various options proposed to effect such change, and DESNZ is keeping most options on the table for now.

We summarise below responses to some of the proposals put forward in the REMA Consultation.

Wholesale market

The vast majority of respondents agreed on the need to consider incremental reforms to the wholesale market, but responses seem to be weighed against radical market design options.

The option to split the market by generation type, although retained, did not obtain much consensus. In this respect many argued that this option would be too disruptive and may undermine investor confidence – which will be crucial given the levels of investment needed to hit the UK’s Net Zero goals. DESNZ also recognised that the CfD scheme or additional support to PPAs could be valuable alternatives (and this not only in relation to the market splitting option, but also with respect to other areas such as Mass-Low Carbon Power, as further detailed below). We also discuss DESNZ’s further consultation regarding reforms to the CfD regime in our LawNow comment here.

Local Imbalance Pricing as an alternative to Marginal Pricing and Pay-as-bid were both struck out from further consideration. This was mainly on the basis that such mechanisms would undermine investor confidence, risking an investment hiatus in renewables, and that they would not meet the “least cost” requirement.

Many responses flagged the need to better consider the possible impacts on consumers of any newly proposed market arrangement. With respect to those options that imply a fundamental redesign of the current system, many also flagged the need to adopt a proportionate approach to any reform proposal. Finally, various replies highlighted the need to look at “best value” rather than “least cost” as criteria against which any proposal should be evaluated.

Mass-Low Carbon Power

Many respondents noted the success of the CfD scheme and favoured a reform aimed at widening its scope, and/or allowing more price exposure within the scheme.

In this context, many also flagged the importance of PPAs and suggested that the Government put in place mechanisms to support the PPA market, for example through incentives of PPA standardisation, mechanisms to match supply and demand, or by underwriting arrangements to reduce counterparty risk.

In response to feedback received, the facilitation of PPAs is an area that DESNZ is willing to consider further, despite it not initially being envisaged as one of the options for reform under the REMA Consultation. This further emphasises the wider theme that respondents seem to favour the evolution of existing tools rather than a radical market redesign. It will be interesting to see how this area, as well as the CfD scheme, will be taken forward by DESNZ.

Overall, the majority of respondents seemed to favour centralised options (where the Government determines how much capacity is bought under long-term contracts) rather than decentralised ones. On this basis, the Government has decided not to bring forward the option to introduce a Supplier Obligation to procure green electricity to their customers as standalone option. The Supplier Obligation was unpopular among respondents, being seemingly less workable, particularly in light of the recent supplier crisis and the reduction in the number of suppliers in the market. Some responses also highlighted the need to wait for the outcome of other ongoing reforms currently being considered, including the Future of the Energy Retail Market review. The role of suppliers will nonetheless remain a point for consideration in the context of the reform.

Flexibility and Capacity Adequacy

The vast majority of respondents agreed that the Capacity Market should be reformed, with mixed responses regarding the approach.

As per the Supplier Obligation in the context of Mass-Low Carbon Power, DESNZ has again decided to strike out the option to introduce a Supplier Obligation to incentivise flexibility as a standalone mechanism.

The Government will also not take forward the options concerning Capacity Payments and Decentralised Reliability.

All other proposals remain under consideration. Some respondents highlighted how introducing ‘caps and floors’ for flexibility may be suitable for de-risking investments, in particular with respect to assets with high capital costs. However it was also noted how establishing caps and floors for different technologies may be difficult in practice, given different technologies may require different evaluations of which caps and floors to apply. This is a policy option which is separately under consideration in relation to long-duration storage (see our comment here).

Respondents also saw merit in continuing to consider the Strategic Reserve option (i.e. auctions of amounts of capacity in excess of what the market is expected to provide, with reward mechanisms for available providers). However, concerns were flagged in respect to possible market disruptions and the need to better understand costs and benefits of this option. The Government has decided to progress this option, but as an emergency or transitional measure to be deployed in conjunction with other measures. 

Operability

With respect to operability, the majority of respondents agreed that continuing with the status quo was not a viable option. Substantial support is required for enhancing existing policies, and for improving the level of coordination between the Electricity System Operator and distribution network operators. Respondents also saw merit in amending the CfD to incentivise ancillary services, though responses were more mixed on modifying the Capacity Market and on introducing co-optimisation within wholesale markets.

Options Across Multiple Markets

DESNZ has decided to not pursue the option for a payment on carbon avoided for either Mass-Low Carbon Power or flexibility, and the option for an equivalent firm power auction. Regarding the latter in particular, it was considered that putting responsibility for procuring flexibility at the generator level, rather than at a system level, would be inappropriate.

Next Steps

Whilst the Consultation Response demonstrates the case for change, six months on from the publication of the REMA Consultation we seem to have little more clarity on how this is to be achieved. Given the impact of market uncertainty on investor confidence, a clear long-term vision for market reform is needed. As the lack of consensus in the Consultation Response demonstrates, this vision is not immediately obvious. As such, DESNZ has indicated that they will issue a new consultation this Autumn to further explore the options available. What the Consultation Response has shown us is that it is still all to play for in the world of GB electricity market reform.