The Energy Transition | UK government confirms reforms to national pricing in REMA electricity market update

This week we look at the government's announcement on the Review of Electricity Market Arrangements, Ofgem's proposed rejection of a "cap and floor" for TNUoS charges, the National Wealth Fund's investment into carbon capture and storage, and more.

Government's REMA update confirms plans to reform national pricing

The Department for Energy Security and Net Zero (DESNZ) has published its Review of Electricity Market Arrangements (REMA) summer update that confirms its plans to reform the existing national pricing system rather than introduce zonal pricing.

The announcement on 10 July is the culmination of a lengthy decision process that began in 2022 on whether the government should retain the current system, where all areas in Britain pay the same wholesale price for energy, or adopt zonal pricing, which would split Britain into different pricing zones depending on an area's proximity to energy generation.

DESNZ stated that there were significant risks, uncertainty, and complexities to the delivery of zonal pricing that could not be satisfactorily addressed. The energy secretary, Ed Miliband, said: "As we embark on this new era of clean electricity, a reformed system of national pricing is the best way to deliver an electricity system that is fairer, more affordable, and more secure, at less risk to vital investment in clean energy than other alternatives."

The government has acknowledged that the current electricity system faces significant issues, in particular the misalignment between where energy is generated and the ability of transmission networks to carry power to where it is in demand. This REMA update also sets out a package of reforms to create a more coordinated and strategically planned system that will increase operational efficiency and reduce running costs.

Strategic Spatial Energy Plan

DESNZ has confirmed that the Strategic Spatial Energy Plan (SSEP), due to be published by the National Energy System Operator (NESO) in 2026, will be central to the reformed national pricing system. The SSEP will set out how to spatially optimise the energy system across land and sea by assessing the location, quantity and types of energy infrastructure required across Britain to meet future demand. DESNZ hopes that this will reduce wait times for connection for both generation and storage assets as well as cut network constraint costs.

Charging review

Working alongside Ofgem, DESNZ will review transmission network use of system (TNUoS) charges and connection charging, with the aim of making charges more predictable in order to give investors confidence about where new generation should be built.

Ofgem will publish an open letter shortly to initiate this review. DESNZ intends to deliver the changes by 2029 at the latest. DESNZ anticipates publishing a "detailed delivery plan" by the end of 2025 which will set out how it intends to reach this 2029 target.

Constraint costs reduction

DESNZ will work alongside NESO to launch a consultation on further reforms to reduce constraint payments, including proposals to incentivise development of projects in areas of need and measures to increase electricity flow across network boundaries. DESNZ will also be working with NESO to deliver its Constraints Collaboration Project.

This update also identifies potential further areas for reform, which DESNZ states it will continue to consider with Ofgem and NESO, including:

• lowering the mandatory Balancing Mechanism participation threshold to allow smaller assets to participate;
• aligning the market trading deadline with gate closure to assist NESO in balancing the grid;
• ensuring physical notifications match traded positions to give NESO a more reliable picture of what each asset is planning to generate to clarify the balance of supply and demand;
• reforming unit-level bidding to enable a level playing-field between small and large market participants; and
• improving interconnector flows to enhance energy co-operation with the EU.

DESNZ hopes that this REMA update will give clearer signals to investors ahead of investment decisions about the relative system value of investing in different locations, alongside providing clarity ahead of Allocation Round 7.

Later this year, DESNZ will publish the reformed national pricing delivery plan, setting out next steps for the design and delivery of a reformed system, and a final REMA analysis, including a full cost-benefit analysis of the different wholesale market reform options.

Ofgem rules out temporary "cap and floor" for generators' transmission network charges

Ofgem has released its preliminary decision on CMP444 that states it is "minded to" reject a proposal for a "cap and floor" mechanism to be introduced for transmission network use of system (TNUoS) charges for generators. Ofgem will now consult with stakeholders on its proposed rejection, as it outlines significant changes that could impact future operational costs and strategic planning. In particular, developers have long-sought greater certainty around this issue ahead of bids concerning the Contracts for Difference in Allocation Round 7.

The consultation outlines Ofgem's stance on the CMP444 proposal emphasising the importance of transmission charges paid by generators as a key element of the energy market's cost structure. Ofgem's decision seeks to guarantee that these charges are fair, transparent, and accurately reflect the costs incurred by the transmission network.

In making this decision, Ofgem has noted the importance of maintaining consistency with other market signals and regulatory frameworks. The consultation raises concerns that such a mechanism could disrupt market signals and create inefficiencies in resource allocation. Instead, Ofgem plans to retain the existing methodology, which it believes is more in line with the principles of cost-reflectivity and fairness.

Previously, Ofgem has considered exploring cap-and-floor structures to mitigate the uncertainty of unpredictable TNUoS charges. However, after assessing stakeholder feedback and detailed proposals, Ofgem has concluded that these solutions would not better achieve the applicable Connection and Use of System Code (CUSC) charging objectives (ACOs) compared to the current provisions. The proposals were found to be negative in terms of cost-reflectivity and administrative efficiency, and neutral regarding other ACOs.

The absence of a cap and floor means that transmission charges will continue to be subject to market dynamics, including potential fluctuations that could affect future financial planning and investment strategies. However, this approach ensures that charges remain fair and reflective of actual costs, promoting a more stable and predictable market environment.

The consultation is open until 11 August, with the government looking particularly for responses from parties affected by the proposals. (Responses should be sent via email to tnuosreform@ofgem.gov.uk.)

National Wealth Fund invests £28.6m into carbon capture and storage project

The government-backed National Wealth Fund (NWF) has announced a £28.6 million equity investment in the Peak Cluster pipeline, a carbon dioxide transport pipeline that will form part of a carbon capture and storage (CCS) project network in the North West of England.

The pipeline will transport carbon dioxide emitted at cement and lime manufacturing plants across Derbyshire and Staffordshire to the East Irish Sea, where they will be stored under the seabed as part of the Morecambe Net Zero (MNZ) project.

Derbyshire and Staffordshire account for 40% of the country's production of cement and lime, two of the hardest industrial sectors to decarbonise due to the carbon-intensive manufacturing process. As the emissions generated by cement production cannot be tackled by electrification or transitioning to low-carbon fuels, CCS projects such as the network comprising the Peak Cluster and the MNZ project are considered to have an important role in decarbonising the sector.

The NWF's investment follows the chancellor Rachel Reeves' announcement as part of the Spring Statement that CCS should be a priority sector for the energy transition. NWF's funding is in addition to a further £31 million investment from the private sector. A key part of the NWF's role is to incentivise such private sector investment through initial public funding to accelerate the delivery of vital projects.

John Flint, CEO of NWF, said: “substantial private investment, deployed at risk, will be needed to develop and deliver carbon capture projects across the UK. Through its investments, the NWF is well placed to support this."

Boost for Sizewell C nuclear project as EDF confirms investment

EDF, following the UK government's recently published investment of £14.2 billion into the Sizewell C nuclear project, has emerged as the first investor to publicly confirm its 12.5% stake into the project. The confirmation marks a significant development in UK-French energy collaboration and represents a notable advancement in the government's focus on nuclear energy as a critical component in the pursuit of net zero.

The UK government has described the financing strategy for Sizewell C as an 'innovative funding model that spreads costs between consumers, taxpayers, and private investors' and, while full investment details are yet to be disclosed, the government aims to maintain significant oversight to avoid spiralling costs and delays.

EDF predicts that Sizewell C will meet 7% of the UK's energy needs for at least 60 years and support up to 70,000 jobs across the UK. The project is recognised for its job creation capacity, with 10,000 jobs expected at the peak of construction and further benefits to the national supply chain.

In addition, UK company Urenco has signed a 15-year, multi-billion euro deal to produce enriched fuel for EDF nuclear power stations. Assystem, a French engineering company, has also laid out plans to double its UK-based nuclear workforce across 10 sites, including Derby, Sunderland, Blackburn, Bristol and London.

The chancellor, Rachel Reeves, has suggested this growing momentum is "part of the new confidence we're seeing in the UK as an investment destination" to deliver the biggest nuclear building programme in a generation.

This article was written with the assistance of Ellie Smyk, trainee solicitor, and Sumaiya Hafiza, solicitor apprentice.