Posted on: 11/08/2022
Record high prices and looming net zero targets have pushed the UK government to launch The Review of Electricity Market Arrangements (REMA) as ‘biggest electricity market shake up in decades’. James Graham, Vice President of Sales, shares an overview of the key REMA proposals and the challenges ahead for Winter 2022-23. Is REMA the answer to the UK’s Energy Price Crisis?
Over the last month, BEIS have launched a major review of the UK’s electricity market arrangements, known as REMA; National Grid ESO published their latest Future Energy Scenarios report and most recently their Winter Outlook for 2022/23, highlighting the potential tight supply margins and price spikes ahead; and Ofgem has confirmed that the Default Tariff Price Cap will be set quarterly, to better reflect the costs of the wholesale market.
Meanwhile, we've witnessed significant wholesale price volatility as a result of Russia's gas curtailment to the EU and limited availability of French nuclear supplies. We have already seen the initial impact of these factors as the energy crisis has moved at pace over the last year, driving Winter 22 base prices up from less than £100/MWh in August 2021 to over £500/MWh at the beginning of August 2022 (based on the forward seasonal prices).
What is REMA and is it the UK's silver bullet?
The Government has launched REMA to pave the way for what it said could be the biggest reform of the electricity market in a generation to improve security of supply and cut prices.
Possible changes under the Review of Electricity Market Arrangements (REMA) include decoupling gas prices from the wholesale electricity market, reforming the Capacity Market to attract low carbon flexibility technologies, and introducing incentives for consumers to use energy when demand on the grid is lower.
BEIS said it wanted the review to radically reduce the country’s exposure to volatile global gas markets and to cope with an expected doubling in electricity demand over the next 13 years. Energy Secretary Kwasi Kwarteng said: “In what could be the biggest electricity market shake up in decades, I am confident that this review will significantly enhance GB’s energy security and supply for generations to come.” The consultation on the review is open until the 10th October.
As SmartestEnergy prepare for an unpredictable winter, REMA set out positive steps to support UK energy consumers from a price and security of supply perspective, but any market reform will be up against unprecedented external market factors driving extreme price volatility.
Additionally, as reported in the industry press, there are a number of challenges facing REMA, such as the infrastructure needed to achieve the 150% increase in capacity of UK generation by 2035.
I've outlined some of the changes that have been proposed and how they stack up against the Future Energy Scenarios targets:
- Offering incentives for consumers to use the grid's energy at reduced prices during times of low demand or when it's very sunny and windy making it cheaper for households.
- Capacity market and Contracts for Difference reformation and enhancements that will increase the participation of low carbon flexibility technologies to lower costs
- Separating expensive global fossil prices from energy produced by cheaper UK renewables to bring down energy bills
When looking at our current position in renewable generation capacity, Future Energy Scenarios outlines that primarily wind and solar, has quadrupled over the past 10 years from 12.5 GW in 2012 to 49 GW in 2021. By continuing on today’s trajectory, by 2030, wind and solar generation will have risen to at least 66% and by 2050, it will meet 70% to 84% of annual electricity demand therefore more low carbon generation is needed to meet our renewable energy targets. Their ‘Leading the Way’ best case scenario highlights the importance of flexibility with the possibility of demand side flexibility reducing unmanaged peak demand by over 40% by 2035.
The current consultation will run until 10th October 2022 and BEIS is now calling for input from industry stakeholders on the proposed reforms. Cornwall Insight comments that ‘timescales are also very ambitious with the expectation of a road map in place ahead of the next general election’ and therefore, drastic changes are only expected to hit in 2023.