Reforming the UK electricity market: Location, location, location

• After a long delay, the government has published a second consultation on potential reforms to the UK’s electricity market. The consultation is focused on how to deploy clean power and low-carbon flexibility to deliver government’s target for net zero power emissions by 2035. It does not consider future arrangements for the retail energy market, which are being reviewed separately.  
• The most significant potential reform included in the consultation is a shift away from a single national electricity price to a system of pricing zones – but ministers ruled out a more radical move to granular nodal electricity pricing. 
• The consultation came alongside a speech by the Energy Security and Net Zero Secretary Claire Coutinho, in which she sought to establish a political dividing line with the Labour Party on the need for new gas-fired generation. 

Flint View

The urgency of the initial stages of the government’s Review of Electricity Market Arrangements (REMA) has drifted in recent months. Formally launched in October 2022, the aim was to swiftly interrogate potential reforms that would better insulate the UK from future global price volatility. But the complexity of implementing major reforms, while maintaining fragile investor confidence, has led to delays.

The decision to launch the next stage of the process within a political speech on energy security is notable. It reflects the government’s determination to establish a dividing line with the Labour Party on green issues, in an attempt to portray Labour as a risk to energy security. Labour sought to avoid the potential trap by emphasising that it accepted the need for new gas-fired generation. Beyond REMA, the speech didn’t include any significant further measures to promote energy security. 

Despite the political overlay, the REMA consultation itself does not propose radical new measures to build gas-fired electricity generation or alter the trajectory to a system dominated by renewables. It does cite independent evidence suggesting the need for 22-28GW of unabated gas capacity in 2035, which the Secretary of State confirmed will require a minimum 5GW of new or refurbished gas capacity, but this is in line with current industry expectations. The consultation remains focused on reforms that will accelerate the roll out of renewables and low-carbon flexibility. 

The REMA publication shows government favours gradual – not radical – reform of the UK electricity market. Government committed to maintain and evolve the Contracts for Difference (CfD) scheme as the primary means of scaling up low-carbon power, and make targeted reforms to the Capacity Market to bolster low-carbon flexibility (given as much as 55GW of short-duration and up to 50GW of long-duration storage could be required in 2035). Government has also ruled out the most radical change proposed to ‘break-up’ the wholesale electricity market, something that investors and businesses will welcome.      

Despite narrowing the range of reforms under consideration, one major reform remains on the table – a shift to locational pricing. Government has ruled out a more radical shift to nodal pricing, but is consulting on breaking up the current national pricing model and moving to a system of around 12 pricing ‘zones’, arguing it could lower energy system costs by c.£5-15bn from 2030-2050, saving households £20-45 per year. No final decision has been taken (including on when it would be introduced) and existing assets will be protected. There are also other options considered, such as whether to just expose interconnectors to locational pricing. But such fundamental reform would materially affect the economics of new generation assets, especially those in low-demand areas – such as offshore wind in the North of Scotland. The already fractious debate on locational pricing will intensify.

For a closer look at how potential zonal electricity pricing, alongside how wider grid and planning reforms could reshape UK investment decisions in power-intensive industries such as data centres, read our analysis here 

Final decisions on the most significant reforms will inevitably fall after the next election. Labour has so far been largely silent on the more politically contentious elements, which is unlikely to change pre-election. In pursuit of its target ambition to decarbonise the power sector by 2030, Labour is unlikely to look favourably on reforms that risk delaying investment. Nonetheless, investors and businesses therefore still face uncertainty on the final design of the UK electricity market. 

Further detail

Summary of process:  

• In 2022, the Government published its first consultation on the Review of the Electricity Market Arrangements (REMA)
• The government’s response to the first consultation, which kept nearly all of the original proposals under consideration, was published in March 2023
• Today’s second consultation, alongside an options assessment, seeks to narrow down policy options.  The consultation closes on 7 May 2024
• The Government expects to provide a summary of responses in summer 2024, concluding the policy development programme by mid-2025 with a view to moving to implementation from 2025 onwards, or earlier where possible

Figure 2 from the second REMA consultation shows how proposals set out in the first REMA consultation have progressed. 

This blog was written by Partners Josh Buckland and James Kilmartin. Josh leads Flint’s work on energy, sustainability and environmental issues. Prior to joining Flint, Josh was Energy Adviser to the Secretary of State for Business, Energy and Industrial Strategy. James is a former adviser to Labour’s Shadow Cabinet. He oversaw the Labour’s Energy and Climate Change team’s preparations ahead of the 2015 election, including access talks with civil servants. If you are interested in the full details regarding UK energy market reform, or the implications on energy policy from a potential Labour government, please get in touch.