The UK government is shaking up the way our electricity markets work, and this could have implications for your company’s climate targets.
What’s happening?
The UK government is reviewing the way that energy is procured and delivered to customers in Great Britain. (This doesn’t include Northern Ireland, which has its own arrangements.) The Review of Electricity Market Arrangements (REMA) began in 2022 with a consultation to help the government narrow down its options. It now has a second consultation open until 7 May 2024.
What’s the point?
The government is committed to two things: decarbonising our electricity system by 2035 and keeping that system market-based. The problem? The markets in their current form will not deliver that decarbonisation goal. REMA is exploring ways to reshape the markets in service of cleaner energy, faster.
“Locational signals”
One of the problems the UK is experiencing on the road to net zero is a growing physical distance between renewable generation sources and the actual demand for that electricity. This is putting a strain on the network. So, one of the challenges for the new system is to solve this mismatch through providing “efficient locational signals”.
ENTRNCE has long argued that to make the right decisions about energy, you need granular data. The government is now proposing to use half-hourly data on the mix of energy in the grid to incentivise different behaviours. Locational market signals would encourage the operators of renewable assets to adjust output based on local demand. They would also incentivise high-volume consumers to reduce or time-shift their energy use. (In the long term, these signals would also influence decisions over where new assets are built.)
Zonal pricing
This shake-up of locational incentives might also include the introduction of zonal pricing – splitting GB’s wholesale electricity market into up to a dozen zones. Currently, the so-called market clearing price on the UK wholesale market is set by the marginal plant – that is, the plant with the highest generation costs. (This is usually the last plant to come on stream.) Under zonal pricing, the price for each zone would be set by the marginal plant for that zone. This is supposed to cut costs across the board – but also potentially creates incentives for businesses to relocate to areas with more renewable generation assets and therefore cheaper energy.
Clear focus on transparency
We don’t know exactly what the outcome of REMA will be, but the direction of travel is clear: the government wants to see a clearer link between generation and consumption of energy. It wants to reward green generation, especially close to areas of high demand. Conversely, when renewable output is flagging it wants to reward demand reduction.
Physical location will become more important; if cheap renewable output in an area is nosediving, there may be incentives for high-volume consumers in that specific area to curb consumption until the sun shines or the wind blows again.
ENTRNCE has been making the point for years that the current system, where the mix of energy sources in the grid is opaque so many consumers, is no longer fit for purpose. Nor is the use of annual reconciliation to calculate how much “green” energy is sold. So it’s great to see the current consultation document praising half-hourly metering and data transparency as a way of sending clearer price signals.
Businesses don’t need to wait for the reforms to become law, or even to be announced. The information you need to act is already here. The ENTRNCE Matcher allows you to align the energy consumption of your business with times of high renewable output. It also lets you make longer-term decisions about what assets to invest in or what contracts to consider. To get ahead of the changes, contact us for a Matcher demonstration.
