Background and case for change

The New Electricity Trading Arrangements (NETA) took effect in March 2001, covering England and Wales and were later extended, in April 2005, to include Scotland in what is known as the British Electricity Trading and Transmission Arrangements (BETTA). These arrangements introduced a single set of wholesale electricity trading and transmission arrangements based on the core principles of:

• National pricing (all generation and all demand receive the same wholesale price, irrespective of their location or system impact of their operation), with locational signals provided through network charges.
• Technology neutrality whereby all technologies can, by and large, compete in the same set of markets.
• Self-dispatch whereby generators self-schedule and commit their output, with National Grid ESO handling any necessary balancing action and a balancing mechanism in place to incentivise supply matching demand.

As climate change has become a central priority for the government, incentives and regulations designed to drive the delivery of renewables and decarbonisation have been added to the policy framework. In 2013, the Electricity Market Reform (EMR) introduced mechanisms such as Contracts for Difference (CfD), Capacity Market, carbon price support, and the emissions performance standard.

In its first REMA consultation, the government highlighted that, while the existing market arrangements have helped to deliver the first phase of decarbonisation, the growth of renewables is leading to an increased mismatch between trading arrangements, which were designed for fossil-fuelled plants, and the market’s core technologies.

Challenges associated with this include:

• Price cannibalisation, whereby wholesale market revenues alone will not be sufficient to deliver the unprecedented volumes of investment required.
• Missing money, whereby revenues for generators do not accurately reflect the value of investment in reliable energy supply.
• Lack of sufficiently granular temporal or locational price signals.
• Lack of investment signals for low carbon flexibility, with prices currently set by the most expensive generators which is usually gas.
• Limited visibility of generation and demand at the distribution level.

The government alluded to the need for electricity market reform in several policy documents over the last few years and committed to undertaking a review of the current electricity market arrangements in its April 2022 Energy Security Strategy.

Following this, in July 2022, the government published its first REMA consultation. This was the first step in the REMA programme, with the government setting out its case for change of current electricity market arrangements. This involved an assessment of whether the existing arrangements meet five future challenges identified through scenario analysis in collaboration with Ofgem and National Grid Electricity System Operator:

• Increasing the pace and breadth of investment in generation capacity, particularly low carbon flexibility assets.
• Increasing system flexibility to manage periods when renewable output is low.
• Providing efficient locational signals to minimise system cost.
• Retaining system operability through bringing forward enough investment in alternatives to high carbon technologies.
• Managing price volatility as the penetration of renewables increases.

The government said that it does not consider that existing market arrangements are likely to meet these future challenges. On this basis, it concluded that there is a strong case for change and that a full range of possible options for reform should be considered.