Utility Week

UTILITY WEEK | AUGUST 2022 | 15 Electricity more incremental approach that could avoid some of these drawbacks and be imple- mented sooner. The Electricity System Operator would manage the renewable power pool, which would operate alongside the existing whole- sale market, in e• ect creating a "centrally coordinated" Power Purchase Agreement market, according to the paper. Renewable generators would contract with the system operator to sell their power into the pool at their long-run marginal cost, like having a CfD. Consumers, which Grubb envisages would be mainly industrial and commercial users, could then purchase elec- tricity from the pool that would be cheaper than the main wholesale market but more variable. Big signal to the market Adam Bell, the BEIS department's former head of energy strategy, is impressed by the sheer amount of work that his ex-colleagues have put into the REMA document. "It covers o• the entire entirety of the debate: a lot of work has clearly gone go into it," he says. It heralds major reform, he adds: "This points to a signiˆ cant amount of reform because the current market will not deliver the mix and volume of assets you need. "BEIS is very clear that the existing suite of instruments will not deliver the 2035 tar- get at least cost and that is a big signal to the market that change is on its way." Josh Buckland, a former government spe- cial adviser on energy, agrees that the analy- sis of the current market is correct. "The statement that the current structure results in costs being too high and not deliv- ering the scale of low-carbon infrastructure that's required quickly enough is absolutely sound." Change will mean higher costs of ˆ nanc- ing, warns Bell. "This document has created an enormous amount of political risk for any- one looking to invest in the UK. Prices will go up as a consequence of the risk attached to the market now." Reform cannot be ducked though, he says: "Unfortunately, they [BEIS] had very little choice. The alternatives would have been even more costly. They have made the right call, but everything's a trade-o• ." Another risk is that by the time consulta- tion has ˆ nished on this week's publication, there will be a new prime minister and prob- ably a new set of energy ministers too. The – urry of announcements from BEIS, as well as its secretary of state Kwasi Kwarteng's failure to attend a grilling by the environment audit committee last month, suggest that he knows his time in the role is running out. "He will have wanted to ensure he got something substantial out the door as part of his legacy. It's a substantial document and a good legacy," says Bell, who is now director of policy at consultancy Stonehaven. Daniel Newport, BEIS's former head of heat and buildings strategy, believes that the Treasury will want to see high energy prices resolved via market reform rather than con- tinued handouts. And the technical nature of the proposed electricity market design changes means they are "probably safe" from the wider political turbulence but are unlikely to "com- pletely – y under the radar", says Newport, who is now at the Tony Blair Institute for Global Change. The main question now concerns the pace and scale of wholesale market change that BEIS is prepared to contemplate. Buckland says: "They are deˆ nitely in the market for doing something quite signiˆ cant but they know that there are risks doing that and they obviously want to take a cautious and sensible approach. "They are clearly taking into account the impact of the current short-term crisis, but explicitly stating that that is not going to drive the reform programme, which is going to deliver the 2035 decarbonisation." Bell is more concerned about whether BEIS is prepared to act fast enough. "Reform is coming but the scale is still up for grabs. It's entirely possible that at some point BEIS will get frightened and opt for some tweaks to the CFD and possibly network charging. That would be a missed opportunity. "What they do now is going to be really important for continued delivery of the pipe- line of o• shore and onshore wind and all those assets we are going to need for 2035. "There's a lot of value to be gained from the debate we're about to have. The draw- back is the timescales do not re– ect the chal- lenge facing us, especially when it comes to marginal pricing. The big challenge of UK marginal pricing is going to be this winter." He worries that BEIS isn't really grasp- ing the scale of the looming challenges surrounding energy costs, pointing to pro- jections in the REMA document that show power prices returning to normal levels by›2025. "Why BEIS assumes this is unclear," he says, pointing to the less upbeat price trajec- tory recently outlined by the Oœ ce of Budget Responsibility. Where is the urgency? Grubb agrees that BEIS will have to come up what answers more rapidly than on the time- scales outlined in the consultation paper, which suggests that the reforms will be developed by the end of next year. The mismatch between headline energy bills and the cost of generation will become glaring this winter, he says: "A big vulner- ability is the politics. People are going to be paying over £3,000 when the actual average cost of generation is a hell of a lot less. The REMA document doesn't take that seriously enough as a fundamental issue." He says the document suggests that BEIS is worried about the complexities involved in disentangling current arrangements. However, taking years to sort out the mar- ket in a context where people are having to choose between food and fuel won't wash with the public, he says. "It's not a good answer politically. If the government does not take strong action, I would have thought any decent opposition party would tear them to pieces because of the bills crisis. "It [REMA] makes the right noises about the depth of reforms and all the issues but it doesn't give an impression of real urgency. Politicians are going to demand something be done. If BEIS have not managed to work out what can be done by next summer in time for the following winter, it could get quite messy." David Blackman, policy correspondent "A big vulnerability is the politics. People are going to be paying over £3,000 when the actual average cost of generation is a hell of a lot less. The REMA document doesn't take that seriously enough as a fundamental issue." Professor Michael Grub, UCL "A big vulnerability is the politics. People are going to be paying over £3,000 when the actual average cost of generation is a hell of a lot less. The REMA document doesn't take that seriously enough as a fundamental issue." Professor Michael Grub

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