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Jack Richardson: The future of the UK's electricity market

Jack Richardson (Senior Climate Programme Manager at CEN)

This week, BEIS published a consultation on its review of electricity market arrangements (REMA). Despite the anodyne name, this document heralds the biggest shakeup of electricity markets in almost a decade. It’s a massive undertaking which will hopefully start the process of building a national grid fit for the transition from a grid based on big, centralised fossil fuel power stations to cheap, decentralised, homegrown renewables.

The 2013 Electricity Market Reform reduced renewables’ risk and cost while maintaining security of supply. It created the Contracts for Difference (CfD) mechanism, which has seen the price per unit of offshore wind fall by 70% since 2015. For just under £300 million, the most recent round of CfDs procured enough power for 12 million homes, which will come online in five years and be four times cheaper than electricity generated by gas power stations.

Even before the gas crisis, wind and solar provided the cheapest electricity available. Building more renewable capacity to reduce the burden on gas for power generation is critical for energy security and bringing bills back down. Meanwhile, ending the UK’s contribution to climate change (net zero) means electrifying as much of the economy as possible - particularly heat, industry, and transport. Electrification means power demand will rise two or three times compared to what it is now.

Renewables generate cheaper power - by 2035 BEIS expects wholesale power prices to be zero half of the time - but they are intermittent and decentralised. While they will be the workhorse of our energy system because they are more affordable and secure, we need to prepare the grid to suit their characteristics better. This is where REMA comes in: it is to facilitate “the cost-effective transition to the future larger, cleaner and more decentralised electricity system”.

Challenges within REMA include building more wires to bring power from a wind farm to your home and ensuring there’s enough low-carbon flexibility and capacity in the system to keep the lights on even on still or cloudy days. And then there’s the question of moving from our national pricing system to a California-style local pricing system which would mean lower bills the closer demand is to supply, as suggested by Onward and the Energy Systems Operator. Do we make bills unequal across the country to drive efficiency?

With the price cap projected to rise to as high as £3,363 in October, the most urgent challenge is delinking the wholesale price of power from the marginal price of gas to ensure consumers directly benefit from cheap renewable energy. Politicians are looking for ways to lower bills soon in a more financially sustainable way than ever-expanding direct support packages ahead of what could be a very bleak winter due to Russia withholding gas and the heatwave preventing storage from being filled as much as it should.

One option the new government should consider is offering renewable projects under the Renewables Obligation and Feed-in Tariff a new CfD this autumn, as recommended by Regen. This would mean lower bills in return for more price stability and would cut off the majority - about £90 per year - from the ‘green levies’ on electricity bills.

One reality we must all face up to is that there is not enough gas to go around. We have a mature North Sea basin which is now being sweated to keep the lights on and scaling up a UK shale industry wouldn’t make a difference even if it is economically viable at all. As Shell’s CEO said, we need to reduce our demand for gas. While REMA will hopefully ready the grid for a renewable future, the new government must seek to reduce unnecessary waste or use of gas now. Easy energy efficiency measures that do not sacrifice comfort, like adjusting boiler flows, and facilitating insulation, must be explored.


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