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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 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. Electricity Market Reform (EMR) was introduced in 2013 and consisted of four parts: Contracts for Difference (CfD), Capacity Market, carbon price support, and the emissions performance standard.

While the government highlights that the existing market arrangements have helped to deliver the first phase of decarbonisation, the growth of renewables is leading to an increased mismatch between our 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 has alluded to the need for electricity market reform in several policy documents over the last few years, with the most recent being its commitment set out in its April 2022 Energy Security Strategy.

This consultation is the first step in the REMA programme, with the government setting out its case for change of current electricity market arrangements. This has involved an assessment of whether the existing arrangements meet five future challenges identified through scenario analysis in collaboration with Ofgem and National Grid ESO:

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

REMA vision, objectives and scope

The government set out a vision that future market arrangements will meet, but in order to achieve these outcomes they cannot deliver this on their own.

Approach

The government sets out its approach for the REMA programme and how it plans to consider options for reform.  

Initial options assessment

The remaining chapters of the consultation set out the government’s emerging conclusions from its initial assessment of policy options for reform, with a number of questions set out for each option.