Electricity market review risks investment hiatus

The government’s plans to overhaul the wholesale electricity market risks deterring the investment that will be required over the next five to ten years to meet the government’s 2035 grid decarbonisation target, experts have warned.

The final evidence gathering session of the Business, Energy and Industrial Strategy Committee’s inquiry into decarbonising the power system on Tuesday (21 March) focused on the Review of Electricity Market Arrangements (REMA), consulted on by the government last summer.

Adam Berman, deputy director for investment at Energy UK, told the committee that the reforms should be evolutionary rather than revolutionary.

“We’re nervous that we take so long talking about REMA that its three, four, five years before change when we could have been doing incremental reforms.

“If you don’t have investment, it doesn’t matter how smart the system is.

“Let’s make sure it works and doesn’t scare off the investment we require rather than spend time on reforms that may not see the light of day.”

He also said that the decoupling of gas from cheaper renewables wholesale prices, one of the core objectives for REMA stated by the government, is already happening thanks to mechanisms like Contracts for Difference (CfDs).

He was backed up by Adam Bell, head of policy for consultancy Stonehaven, who said the combination of the REMA reforms and the government’s energy windfall taxes means that investors feel the UK is currently a “little too spicy”.

“They’re not sure whether they want to come to the UK market under these sort of conditions.

“Anything that comes out of REMA will take at least five years, when we will find it harder to attract capital especially into wind”.

Berman also told the committee that the government had “shot itself in the foot” by pushing ahead with the Electricity Generator Levy on windfall profits from low-carbon generators when an industry proposed extension of CfDs would have offered greater and swifter benefits to customers in terms of bill reductions.

And he warned that locational wholesale pricing, another idea being considered as part of REMA, would take seven to eight years to implement and require a “high threshold” of evidence because of the “very substantial change” it would involve. It would also raise political questions about fairness across the country.

Ex-Tory MP Laura Sandys agreed that locational pricing would take a “very long time” to implement. She said it may take until 2031 if it got held up by judicial reviews, adding: “We need to act a lot earlier than that.”

But while expressing caution about moves that would upset investor appetite, Octopus Energy director of regulation and economics Rachel Fletcher said there is a “glaring hole” in current wholesale market arrangements that REMA is seeking to fix.

“We don’t have markets and price signals that allow us to optimise what will be millions of assets across the system that could be making a contribution to balancing supply and demand and avoid the need for expensive back up storage and distribution build.”

The government recently announced that it is slimming down the options it is examining as part of REMA.