Government publishes second consultation on electricity market arrangements in Great Britain

In a significant development in the reform of Great Britain's electricity market, the government has published its second consultation on the review of the electricity market arrangements (REMA). Based on an expansive volume of thorough and well-considered research and analysis, it has narrowed the range of possible options for market reform, the direction of which is now becoming clear. 

Four key challenges

In the first REMA consultation, the government outlined five areas of reform. In this latest consultation, the focus has been narrowed down to four key challenges:

Marginal pricing

Challenge 1 addresses the role of marginal pricing in electricity markets and how to pass on the benefits of low-cost renewables to consumers. The government has ruled out radical options such as a split market and green power pool and instead, the current market arrangements (a unified, pay-as-cleared wholesale market) will be retained.  

Enabling further investment

Challenge 2 focuses on enabling further investment in intermittent renewable energy generation. The contracts for difference (CfD) will remain a key pillar of the net zero transition but may well look very different to its current form.

Indeed, the proposals that remain shortlisted in REMA 2 suggest that the CfD reforms could be among the most significant changes introduced by the government.

Transition to decarbonised system

Challenge 3 addresses the transition away from an unabated gas-based system to a flexible, resilient, decarbonised electricity system. The capacity market will remain broadly similar to its current form but will be "optimised" to support the deployment of low carbon flexibility.

Reconfiguring market arrangements

Challenge 4 focuses on reconfiguring market arrangements for a net-zero world.

Nodal pricing is out but zonal pricing looks likely – and central dispatch remains a possibility. Reforms of the balancing mechanism and ancillary services remain under review.

Osborne Clarke comment

Overall, REMA's second phase presents a clearer direction for future electricity market arrangements. It seems that the most significant changes to the electricity market may be the introduction of zonal pricing and an overhauled CfD.

There may be disappointment in some quarters regarding the lack of net zero ambition in transitioning away from unabated gas. But few could deny the scale of the task faced by government in redesigning an electricity market which can ensure energy security in a net-zero world.  

We have produced a more detailed analysis of the latest REMA consultation – please get in touch with your usual Osborne Clarke contacts or one of the experts below if you would like to receive a copy. The consultation is open until 7 May 2024.