Solar Energy UK and RenewableUK
12 March 2024
The Government has put forward proposals to change how electricity markets operate.[1] A sensible reform package arising from the Review of Electricity Markets (REMA) is essential to ensure we continue to accelerate private investment in clean electricity generation and build a cost-effective system but certain options could do more harm than good, says the renewable energy industry.
One of the measures on the table is a move to zonal pricing, which would divide the wholesale electricity market into zones with different prices. In theory, this should incentivise generation to locate close to demand and alleviate constraints on the transmission grid. Although it is positive to see that this consultation now discards the earlier option of moving to a nodal pricing system (with the price set at hundreds of nodes across the transmission system), we remain sceptical about the claimed benefits of a zonal system.[2]
Zonal would introduce additional uncertainty into the market, raising the cost of capital for renewable energy at a time when we need to deploy around 10 gigawatts of renewable electricity generation capacity each year until 2035 to meet our targets and deliver a lowest cost clean energy system for billpayers.[3]
“Consulting on the best arrangements to underpin our future electricity markets is essential given the levels of system transformation we have seen just in the last decade. We are glad to see the REMA consultation move away from the concept of nodal pricing, which would have been lengthy and expensive to implement and would have provided a disincentive to investment in renewable generation. The consultation is still inviting views on whether zonal pricing can be feasibly introduced while maintaining investor certainty. However, given stronger locational constraints faced by projects – such as planning hurdles, including a de-facto ban on onshore wind in England or grid connections, the influence of zonal pricing on location choices will likely be limited,” said Ana Musat, Executive Director for Policy & Engagement at RenewableUK.
“We welcome this next round of consultation on the electricity market arrangements, as we look to establish a new electricity system: renewables-based and renewables-led, with electricity prices decoupled from the price of gas, and so limiting costs to the consumer,” said Gemma Grimes, Director of Policy and Delivery at Solar Energy UK.
But Solar Energy UK and RenewableUK, the voices of the UK’s solar and wind power industries, have fundamental concerns about the proposals.
Investment
The disruption caused by the implementation of zonal pricing could create uncertainty for investors in renewable energy, increasing the costs of financing projects. Ultimately, this could end up adding unnecessary costs onto renewable energy projects. It is also unlikely that such a system could be implemented in less than 7 years,, as experience from Canada, Australia and Texas suggests.[4] The Energy System Operator (ESO) has dismissed the prospect of doing so next year.[5]
Furthermore, a substantial amount of the theorised benefits of zonal pricing would arise from reducing constraint costs between 2025 and 2030, which would be unlikely to emerge if the reforms cannot be completed in a timely fashion.
Future gas
A further aspect of the reforms concerns the capacity market, designed to encourage investment in backup power supply and to ensure existing generators remain open.
“While the Government has chosen to emphasise the potential role of backup gas power in its announcement today, the renewables industry is doing all it can to deliver a carbon-free electricity system. New, grid-scale energy storage can make this a reality by storing power from renewables, enabling us to use clean, affordable power 24/7, 365 days a year. The storage sector is set to grow leaps and bounds in the coming years, to keep pace with the renewables revolution,” said Grimes.
Open-cycle gas power stations, which dominate the capacity market, are an inefficient technology that was first developed in the 1930s. In contrast, modern grid-scale energy storage can supply vast quantities of green energy in an instant, making it the perfect partner for variable renewables.
[1] Review of electricity market arrangements
[2] Energy Secretary takes decisive action to reinforce UK energy supply (DESNZ)
[4] Wild Texas Wind: Regen Insight Paper on Locational Marginal Pricing
[5] Assessment of Investment Policy and Market Design Packages (ESO)
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Editor’s notes:
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Gareth Simkins, Senior Communications Adviser
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Gareth Simkins
Senior Communications Adviser
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