UK launches biggest electricity market reform in a generation

  • Major design review of the UK electricity market launched by the UK government to radically improve energy security and reduce electricity costs for long-term consumers
  • proposals submitted for initial consultation include exploring changes to the wholesale electricity market that would prevent gas price volatility from setting the price of electricity generated by much cheaper renewables
  • coupled with immediate action to help people with higher energy bills this year, the government continues to be on the side of UK energy consumers in the short and long term

The UK’s exposure to volatile global gas markets and consumer energy costs could be drastically reduced over the long term, thanks to a transformational review of the design of the UK electricity market, launched today. today (Monday 18 July) by the UK Government.

The review of electricity market arrangements (REMA) will seek advice on a wide range of options to meet the combined challenges of responding to higher global energy costs, the need to further enhance energy security and move the UK towards a cleaner energy system.

Some of the changes under consultation include:

  • introduce incentives for consumers to draw power from the grid at cheaper rates when demand is low or there is particularly sunshine and wind, saving households money with cheaper rates
  • reform the capacity market so that it increases the uptake of flexible low-carbon technologies, such as electricity storage, which enable a cleaner and lower-cost system
  • decoupling costly global fossil fuel prices from electricity generated by cheaper renewables, a step to help ensure consumers see cheaper prices through lower-cost clean energy sources

In the current system, gas prices often end up setting the wholesale price of electricity, as it is often the last source of supply to meet demand. The ever-increasing participation of renewables in the system means that over time the cheaper electricity produced by renewables will more often determine the price. This consultation will explore ways to update this pricing system to better reflect the rise of cheaper renewable electricity – something that could have a direct impact on reducing energy costs, ensuring consumers take full advantage of the UK’s abundant and world-leading supply of cheaper, cleaner energy.

Business and Energy Secretary Kwasi Kwarteng said:

We have just seen the price of offshore wind power in the UK fall to an all-time low and gas represents an increasingly smaller share of our power generation mix. We therefore need to explore ways to ensure that the electricity market adapts to the times.

This means ensuring that the financial benefits of our growing supply of cheaper energy are passed on to consumers, but also that our system is ready for the future, especially with the demand for electricity which is expected to double by here 2035.

In what could be the biggest upheaval in the electricity market for decades, I am confident that this review will significantly improve Britain’s energy security and supply for generations to come.

Today’s consultation launch is part of the government’s comprehensive review of the electricity market, first announced in the UK’s Energy Security Strategy (BESS). The BESS dramatically increased ambitions for building low-carbon, cheaper-to-operate technologies such as offshore wind, solar and nuclear, as part of the UK’s plans to deliver a clean and secure electricity system by 2035.

The UK is already making huge strides in accelerating the supply of cheaper local renewable energy. Earlier this month, the UK secured record capacity of almost 11GW of clean energy at record prices, thanks to the government’s flagship renewable energy scheme – almost double the capacity achieved in the previous cycle, and enough to power around 12 million UK homes.

While electricity demand is expected to at least double over the next 13 years, REMA will focus on establishing the right market design, identifying and implementing the reforms needed for electricity markets in Britain that work for business, industry and households.

This includes consulting on both the continued evolution and expansion of existing systems, such as the Capacity Market and Contracts for Difference, and the introduction of more fundamental changes where necessary to ensure uninterrupted supply during periods without wind or sun at the lowest possible cost to consumers.

Energy Minister Greg Hands said:

Today launch of REMA is a major step in delivering a secure energy future for Britain, putting in place the electricity market design we need to enable us to make the most of our diversity of energy sources in the world while offering better value for money to consumers.

Today marks the first major consultation step within REMAcomplete work program. Through this initial consultation, the UK government will work closely with the sector to develop and assess options for reform, with a response expected to be published this winter. Following this consultation, the ministry will develop, refine and narrow reform options over the course of 2022-23 before introducing proposed reforms.

A National Grid ESO spokesperson said:

We salute the breadth and depth of BEIS‘ Examination of the provisions of the electricity market. Wholesale markets must be reformed to achieve net zero and deliver better results for consumers across Britain. REMA is the right forum for stakeholders to align on what is needed.

A Degem spokesperson said:

Consumer protection is our top priority, which is why we are helping the government conduct this far-reaching review of electricity market arrangements. A fair energy market that protects consumer interests will only work if we can make the most of Britain’s cheap and plentiful renewable resources and invest in ways that deliver a net zero to low energy system cost using our local energy.

We now look forward to working closely with government and all participants in this timely review to ensure that our energy market agreements meet consumer interests and help improve bills.

Energy UK Deputy Director Adam Berman said:

The energy industry is ready to help create an affordable, clean power system that meets both our Net Zero goals and energy security. REMA will help ensure that the energy market can channel private investment to meet the government’s ambitious targets for the supply of clean, low-cost, locally generated electricity.

As the cost of energy reaches unprecedented levels, it is right and timely for government to consider how to provide the most efficient market arrangements to support decarbonisation – to lower bills in the long run.

Director of RenewableUK’s Future Electricity Systems, Barnaby Wharton, said:

The electrical system will undergo a profound transformation over the next decade as we continue to build our renewable energy capacity. It is essential that we have a market that supports investment in new projects and infrastructure and allows consumers to take full advantage of a low-cost, low-carbon system.

This consultation is an important step in that process, and industry will continue to work closely with government to build the clean energy system the UK needs to reach net zero as quickly as possible.

Notes to Editors

The government is undertaking a comprehensive review of electricity market arrangements (REMA), as announced in the UK Energy Security Strategy, to help achieve our global climate goals while reducing exposure to volatile international gas markets, bringing major energy security and cost benefits

Read the consultation on the review of electricity market arrangements which is open until 10 October 2022.

The consultation sets out why we believe reform is needed in our change case, on which we are seeking input.

The British government will introduce reform where necessary.

REMA will examine a range of options for reforming electricity markets and policies that can provide signals for investment in and operation of assets that generate or use electricity. It will cover the wholesale markets, the balancing mechanism and the provision of ancillary services; as well as all the policies having an impact on these, including the capacity market and contracts for difference.

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