Four key issues GB electricity market reform must address

The Review of Electricity Market Arrangements focuses on four key challenges in its second stage of consultation

3 minute read

On 12th March 2024, the UK Government’s ambitious Review of Electricity Market Arrangements (REMA) entered its second stage of consultation.  

In our latest insight, we define the challenges the second phase of REMA aims to address, summarise the options available, and set out the decisions still to be made. Fill out the form to download the full report, or read on for a quick overview. 

What is REMA? 

Launched in July 2022, REMA is a comprehensive root-and-branch assessment of all non-retail aspects of the GB power market. The most substantial process of its type in Europe, it aims to create a market that supports rapid decarbonisation while protecting security of supply.  

A first stage of consultation started in October 2022, with the UK Government updating its position in March 2023. The second phase will be open for eight weeks, with a summary of responses to be published in the summer. 

Why does it matter? 

The stakes couldn’t be higher, as the outcome of REMA will decide whether the GB power sector can ensure energy security while delivering on government policy to reach net-zero by 2035. 

Given its mandate, REMA’s scope is very large and highly complex. With the sector in need of rapid, substantial investment in new supply, flexible resources, and infrastructure it must recognise and effectively address the risks for market participants to ensure success.  

What’s at stake in the second stage of consultation? 

The second stage of consultation is an opportunity to share current thinking and priorities. It discounts numerous concepts from further consideration and presents a refined set of options focusing on four key challenges: 

  1. Passing through the value of a renewables-based system to consumers: REMA proposes retaining marginal pricing in the wholesale power market, while developing the existing Contracts for-Difference (CfD) scheme to decouple gas and power prices. 
  2. Investing to create a renewables-based system at pace: Future-proofing the CfD scheme to support continued investment in renewable generation, potentially by moving away from purely output-based payments, altering reference prices, and allowing more flexibility for CfDs to apply only to part of installed project capacity. 
  3. Transitioning from an unabated gas-based system to a flexible, resilient, decarbonised electricity system: Retaining and optimising the Capacity Market while supporting emerging low-carbon sources of flexibility, such as CCUS-equipped thermal generation, hydrogen-fired generation and long duration energy storage (LDES).  
  4. Operating and optimising a renewables-based system cost-effectively: Exploring whether a developed, single national price arrangement or locational pricing is best suited to delivery and operation of a decarbonised power market (nodal pricing has been formally rejected due to its likely negative impact on investor confidence).    

Final choices on market design will come in the next phase, before REMA moves from policy development to implementation in mid-2025. 

Our view 

To deliver on its admirable ambition, REMA must attract significant capital investment to continue decarbonisation in the power market and therefore support broader energy transition via increased electrification. Time is of the essence, yet major potential measures such as moving to a locational pricing market will take upwards of five years to implement.  

At the same time, the need for fundamental reform creates real uncertainty for investors in low-carbon technology and the infrastructure that will integrate it into the power system. Recognising the competition from across the European power market, the UK Government has been careful to discard those initial proposals which had the greatest potential to dent investor confidence. Meanwhile, the recurring proviso that all changes are ‘subject to security of supply’ offers reassurance that despite the need for rapid decarbonisation, essential checks and balances will be in place. 

With a general election due before the policy development phase is even complete, REMA asks more questions than it answers. However, progress to date suggests the eventual outcome will be more evolution than revolution. This should offer some comfort to stakeholders. 

Learn more 

Don’t forget to fill out the form at the top of the page to download your complimentary copy of the insight, which covers the challenges, key options and decisions still to be taken in more detail.