The uncertainty caused by the government’s ongoing Review of Electricity Market Arrangements (REMA) is having a “chilling effect” on the sector.
That is according to industry analysts who criticised the government for sitting on the fence on “hugely disruptive” proposals.
Tom Smout, senior research associate for the British power market at consultancy Aurora Energy, criticised the uncertainty resulting from long gestation of REMA, which was initially published nearly two years ago but is still being consulted on.
Speaking at an event by the Cross-Party Group on Energy Costs, Smout said: “REMA has had the chilling effect of policy change without the benefit of better policy by threatening to change policy without doing it.
“It’s very harmful to announce that you’re thinking about doing policies that are hugely disruptive and then sit on those and not do anything for a long time because investor confidence takes a knock.
“It would be good to see a more targeted approach to really nail down the specific issues that are holding the system back,” he said, naming grid and planning as issues where a “more aggressive, specific focus” is wanted.
Referring to controversial proposals in REMA to introduce zonal wholesale power pricing, he said it is “naïve” to believe that it will result in generation going to where prices are highest because other factors are more important in determining the location of wind and solar farms.
He said the increased cost of capital, resulting from the regulatory upheaval triggered by implementation of such locational pricing, would “quickly offset the relatively marginal gains” that could be achieved from a “better” market settlements
Kate Mulvany, principal consultant at Cornwall Insight, agreed, noting that two years on from the publication of the first REMA consultation, there are still a “huge range of options on the table”.
She said: “REMA is a massive barrier to additional investment and the potential outcome of REMA are perceived to be very, very risky.”
And the uncertainty created by REMA means that “additional risk premia” are being factored by investors into energy projects while leaving industrial customers in the dark about where they should locate their facilities to secure cheaper power.
“That uncertainty has a real impact so we’re urging DESNZ to make robust recommendations and make firm decisions,” Mulvany said, adding that making these choices “sooner” will have a “meaningful impact” on future bill payers.
She added that none of the international markets, where locational pricing has been introduced, offer a “direct parallel for good or bad” to how it would work in the UK market.