Electricity market reform

DOI: https://doi.org/10.58248/PN694

Overview

The UK Government has committed to decarbonise the electricity system by 2035. There is general consensus across industry and academia that the current electricity market arrangements will need reform to deliver the pace and scale of change to meet this target, although opinions vary on the degree and pace of reform.

Reforms are required to incentivise greater decarbonisation, keep prices affordable for consumers and maintain a secure and reliable system. There is also agreement that any reforms should consider investor confidence and avoid disrupting the deployment of new generation and network infrastructure. Potential reforms range from incremental changes to extensive restructuring of the market arrangements.

In 2022, the then Department for Business, Energy & Industrial Strategy launched its Review of Electricity Market Arrangements (REMA) consultation. The summary of responses has been published, with several options for reform eliminated or conditionally eliminated as a result of stakeholder consensus.

Key Messages

• Wholesale electricity market arrangements determine the prices that suppliers pay generators to procure electricity for their consumers. The arrangements also provide investment signals for generation and network infrastructure.
• There is a wholesale market for electricity across Great Britain, with separate arrangements for Northern Ireland. Wholesale electricity prices are set by trades between generators and suppliers, which are ultimately passed on to consumers in the retail market.
• Electricity market reforms are needed if decarbonisation of the electricity system is to be achieved by the Government’s 2035 target, while ensuring affordability for consumers and that the system remains reliable. These reforms are being considered by the Government in the Review of Electricity Market Arrangements (REMA).
• Proposed reforms include modifying government support mechanisms that promote decarbonisation and ensure security of supply, implementing location dependent wholesale prices to reduce network constraints, and options to pass on the low costs of renewables to consumers by separating the market.
• A future Government consultation in autumn 2023 will put forward proposals for packages of reforms.
• Opinions differ over the degree and pace of reforms to the market arrangements needed.

Acknowledgements

POSTnotes are based on literature reviews and interviews with a range of stakeholders and are externally peer reviewed. POST would like to thank interviewees and peer reviewers for kindly giving up their time during the preparation of this briefing, including:  

• Members of the POST Board* 
• Daniel Atzori, Cornwall Insight*
• Owen Bellamy, Climate Change Committee
• Adam Berman, Energy UK
• Rachel Cary, Department for Business, Energy and Industrial Strategy*
• Timothy Chapelle, Energy Systems Catapult*
• Jieyang Chong, University of Reading
• Simon Dawes, Department for Business, Energy and Industrial Strategy*
• George Day, Energy Systems Catapult*
• Phoebe Finn, Ofgem
• Edward Gill, Energy Networks Association*
• Johnny Gowdy, Regen*
• Euan Graham, Citizens Advice
• Richard Green, Imperial College Business School*
• Rob Gross, UKERC
• Michael Grubb, University College London*
• Stew Horne, Energy Savings Trust
• Sarah Keay-Bright, National Grid ESO*
• Desen Kirli, University of Edinburgh
• Furong Li, University of Bath*
• Tom Luff, Energy Systems Catapult*
• Andrew Lyden, University of Edinburgh
• Serguey Maximov Gajardo, University College London*
• Cian McLeavey-Reville, National Grid ESO*
• Phil McNally, University College London*
• Dan Monzani, Aurora Energy Research
• Kate Mulvany, Cornwall Insight*
• Ana Musat, Renewable UK
• David Newbery, University of Cambridge*
• Rebecca Pickavance, Energy Savings Trust
• Lewis Pickett, Department for Business, Energy and Industrial Strategy Committee
• Daisy Powell-Chandler, Public First
• José Luis Ramírez-Mendiola, University of Reading*
• Duncan Sinclair, Baringa
• Heather Stewart, Ofgem
• Isabel Sunnucks, National Grid ESO*
• Anna Taylor, Public First
• Jacopo Torriti, University of Reading*
• Simon Virley, KPMG*
• Stephen Woodhouse, AFRY

*denotes people and organisations who acted as external reviewers of the briefing.