REMA: electricity market design choices

Electricity markets will serve as the foundation for the future GB energy system.  This article examines some of the market design decisions that will be considered by the Review of Electricity Market Arrangements (REMA).

Market design goals

At its most simple, a well-functioning market will attract enough potential “buyers” and “sellers” to produce satisfactory results for both. Good market design will include mechanisms that allow participants to make decisions with confidence.

BEIS identified requirements for the transformation of the GB energy system by 2035.

  • High investor confidence in low-carbon technologies
  • System flexibility optimised for intermittent renewables and adaptable to emerging technologies
  • On-time delivery with unintended minimal disruption, despite the complexity of the existing energy system
  • All delivered at the lowest possible cost to consumers

The consultation published on 18 July 2022 describes a “whole-system approach” to reform. REMA will focus on the longer-term market arrangements needed to ensure supply security, cost-effectiveness, and decarbonisation.

The scope of REMA

The wholesale market, balancing mechanism, ancillary services, the current Contracts for Difference scheme, and the Capacity Market are all included in REMA. Non-electricity markets (such as hydrogen, gas, and carbon), retail markets, incentives for new technologies, interconnectors, and large-scale nuclear investment will generally be excluded from REMA’s focus.

Market design options

REMA is still in its early stages. The initial consultation period runs until 10 October 2022. Proposals are illustrative rather than exhaustive. Some concepts are still theoretical, or might not have been used in a system with GB’s features.

Here is a selection of options from the consultation.

  • Splitting the wholesale market – moving from a single national wholesale price, to twin wholesale prices, splitting intermittent renewables from other generation types. This could reduce the impact of high marginal prices set by gas fuelled generation assets, with an intermittent renewables market treated like the historical “pool” perhaps managed by the Electricity System Operator (ESO).
  • Move to pay as bid – an approach that could decouple prices from those that currently set the marginal price, typically gas fired stations. A “pay as clear” approach could limit the price that generator’s offer power into the market by basing it on their costs and not the marginal price.
  • Introducing locational pricing – a single national wholesale price won’t incentivise sites to be developed where the electricity network can best support them. Introducing a more granular set of prices, each better reflecting the capacity and losses of the network at the point they apply, could act as an incentive when choosing locations for generator or consumer developments. Nodal pricing (locational marginal pricing, LMP) could introduce hundreds of pricing “nodes” across the country. Zonal pricing is somewhat a halfway house, removing some complexity by having a single price for regional zones, but which allows pricing of electricity flowing between zones to reflect the relative network constraints.
  • Creating a new market for long-term response – existing wholesale and balancing markets reward frequent storage charging and discharging, and do not necessarily reward the system value of sustained response. New markets may be required to support long duration storage.
  • Improved temporal pricing – there is value in continuously matching demand and supply across the system. Current market arrangements financially reward balance across 30 minute periods. Dampened signals undervalue flexible assets and limit suppliers’ ability to offer tariffs that encourage consumers to be flexible.
  • Local, distribution network led markets – transmission network constraints could be reduced if suppliers were incentivised to source energy generation locally. Different options are suggested to achieve this.
  • Carbon abatement auctions – instead of conducting auctions based on energy unit strike price (Contracts for Difference), auctions are run to maximise the impact of resources on  reducing emissions.
  • Reform of existing markets – rather than building new markets, incremental change may achieve the goals. Accompanied by widespread digitalisation of system-wide signals to better facilitate a very large number of smaller assets, rather than a handful of large generators.

Future market arrangements must provide the right signals for system flexibility and managing the variability of intermittent renewables. Consumers expect value for money, and investors need to be attracted to fund the required transformation.

These are ambitious goals, as evidenced by the extensive consultation, which is just the beginning of what could be a programme of change that runs for a number of years. Cornwall Insight is well-positioned to assist you in understanding the options presented. We can identify risks and opportunities, develop strategies, and inform consultation responses. If you want to learn more, please contact Kate Mulvany at k.mulvany@cornwall-insight.com

Related thinking

Net zero corporates and ESG

Long-term regulatory and policy changes needed to avoid stalls to business decarbonisation

In light of the financial pressures faced by businesses from rising inflation and interest rates, tight supply chains and labour markets, alongside high energy bills, there is a high chance corporate investment in decarbonisation could be in trouble. In Cornwall Insight's latest Insight paper “Business net zero: Making progress in...

Commercial and market outlook

Winter 2023-24 price cap forecasts fall further below 2022-23 EPG, but long-term prospects remain uncertain

Our latest forecasts for the Default Tariff Cap (price cap) have shown energy bill predictions for a typical household1 have fallen to £3,208 from April, decreasing further to approximately £2,200 for July-August (Q3 2023) and September-December (Q4 2023). These forecasts are around £300/year lower than our previous forecasts issued on...

Energy Market Design

Are prices going to rise in Contract for Difference Allocation Round 5?

A number of factors may be about to put an end to the trend for falling energy prices in the Contract For Difference (CfD) scheme. The CfD scheme has provided strong subsidy support whilst also providing consumers robust levels of protection. High investor confidence and steady reductions in capital costs...

Commercial and market outlook

Tales of the unexpected: what’s happening with gas prices

The gas sell-off for contracts relating to this winter/spring & coming summer has continued in the last few days. On January 16th alone, contracts closed down c15%-17% on gas contracts for this spring and through into summer. This is despite some analysts predicting that gapping-up would occur on the promise...

Business supply and services

Early implications of the Energy Bill Discount Scheme  

People are beginning to take in the changes from the business Energy Bill Relief Scheme (EBRS) to the Energy Bill Discount Scheme (EBDS) that are scheduled for the end of March. As we outlined in our release earlier in the week, the government support is to be scaled back significantly....

Business supply and services

What happened in 2022 in the energy market?

The GB energy market never stands still and 2022 was no different. In this infographic, we look back at some key happenings from the past year in different segments of the GB energy market.  Click the image below to see our snapshot.

Business supply and services

Our response to the announcement of the Energy Bill Discount Scheme 

The government have announced that the Energy Bill Relief Scheme (EBRS) will be replaced by a less supportive Energy Bill Discount Scheme (EBDS) from April 2023. The government have been managing expectations on reducing support levels for business energy costs now for several months and remain under pressure over control...

E-mobility and low carbon

2022’s most exciting ‘Charts of the Week’

Some of our team have looked back throughout 2022 and picked their most exciting ‘Chart of the Week’.​Their choices include exploring green tariffs, wholesale gas prices, CfD allocation round 4 and the MHHS Implementation Levy.  It’s My Birthday – Two years of Dynamic Containment Picked by Tom Faulkner, Head of...