A new report suggests that although there is a case for change to adapt to the demands of decarbonising Britain’s power sector by 2035, the potential advantages of improved operational efficiency from revising electricity market arrangements need to outweigh investment risk.
The qualitative assessment, conducted by energy and bio-economy consultancy AFRY, scrutinised four potential options for revised market arrangements in response to the UK's second Review of Electricity Market Arrangements (REMA) consultation.
The report concluded that while transitioning to a market with varying pricing across different zones holds promise in the long run, immediate action may favour an enhanced market with a single national price due to its feasibility.
According to the study, market designs with central dispatch are not ideal as they could amplify risk for market participants, in addition to encountering hurdles in “deliverability and enduring robustness”. Meanwhile, a decentralised zonal market holds promise for the most optimal operational efficiency but necessitates a comprehensive risk management framework as well as safeguarding of existing rights to manage wealth transfers. Both options would also introduce new risks to investment.
An enhanced national decentralised dispatch market thus emerges as the most appealing option, given its potential to quickly implement all identified measures while achieving "a reasonable share of the operational efficiency gains of a zonal market”.
Stephen Woodhouse, director at AFRY, said: “AFRY’s work has identified two ways forward. One requires international cooperation, and through a series of incremental changes improves the efficiency of the existing scheduling and dispatch arrangements, while managing long-term locational risks for investors. However, it is an open question whether this could deliver enough change.
“The alternative is a more radical option in which we move to a zonal market. That would bring its own set of challenges relating to wealth transfers and managing investor risk, and it would require groundbreaking methods to resolve these issues for this to be a viable option. Our work has not found a move to central dispatch under either a zonal or a national market to be [the] preferred way forward.”
The report added that annual power system costs could surge by 30% in the upcoming decade due to heightened costs of generation investments, and therefore any changes to the market arrangements during this period must go forward with caution so as to avoid raising investment risks, which would burden consumers with additional costs.
The UK has recently attempted – albeit controversially – to improve its electricity market, implementing a price regulation system to keep energy bills affordable and accelerating projects’ grid connection to secure supply. Just last week, the UK Power Networks Distribution System Operator launched a new scheme to allow almost 1GW of new power generation projects to receive fast-track connection to the UK grid.
