Utility Week

14 | AUGUST 2022 | UTILITY WEEK Electricity Analysis How deep will the BEIS energy market reforms go? The government says the electricty market needs a fundamental overhaul, but some in the industry doubt it has yet fully grasped the scale and urgency of the task at hand. I t is probably safe to assume that the intri- cacies of the wholesale electricity market have never greatly troubled prime minis- ters in the past. However, Boris Johnson described the current arrangements for the wholesale elec- tricity market as "frankly ludicrous" in an interview ahead of the ministerial rebellion that terminated his time at No 10 Downing Street. His ire was sparked by a concern that these arrangements mean currently sky-high marginal gas prices effectively set those of the wider wholesale electricity prices, inflat- ing the costs of much cheaper renewables source of power, such as wind and solar. While the PM is heading for the exit, a new and very wide-ranging consultation paper from the Department for Business, Energy & Industrial Strategy (BEIS) outlines steps for fixing this increasingly anomalous situation. For starters, the Review of Electricity Market Arrangements (REMA) paper bluntly states that it is "unlikely that the significant investment needed to decarbonise the power sector will be delivered cost-effectively" by current market arrangements. It says the most cost-effective route to meeting the government's goal to decar- bonise the power sector by 2035 will require changes because current arrangements are based on the needs of fossil fuel generation rather than renewables. Alongside reforms to existing mecha- nisms, such as the Capacity Market and Con- tracts for Difference (CfDs), a whole chapter of the document is devoted to how to deliver a net-zero wholesale market. The existing wholesale market, which has been in place since 2005, is based on the idea that all generators receive the same price across Great Britain, irrespective of where they are located and the technology they use. The reforms mooted in the document her- ald "fundamental redesigns" of the whole- sale electricity market, with significant implications across the system that will take "a number of years" to implement, the docu- ment says. All existing support schemes would need to be updated, including CfDs and the Capac- ity Market, as well as the recently introduced Regulated Asset Base model for large-scale nuclear power and the market arrangements used by interconnectors. Market splitting or green pools The document outlines a series of options for reforming the wholesale market. The first of these is splitting the market into separate ones for variable renewables and firm power, such as gas, which is avail- able all of the time. Splitting the market in this way offers a potential alternative to continued govern- ment support for investment in generation over the long term by enabling investors to recoup their costs solely through market rev- enues, according to the document. However, the mooted split could reduce liquidity within the two mini-wholesale mar- kets, potentially depressing the scope for competition compared to now. It is also unclear where particular tech- nologies would fit, says the document, pointing out that interconnectors or biomass could conceivably be placed in either the variable or firm power buckets. In addition, the transition to a split mar- ket risks creating a hiatus in investment, BEIS admits. The alternative green power pool, which has been proposed by professor Michael Grubb of University College London, offers a Renewables could get a separate wholesale market

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