Government launches awaited second REMA consultation 

Originally expected in autumn 2023, this consultation examines specific proposals and a short-list of remaining options as part of the ongoing Review of Electricity Market Arrangements. 

What is the Review of Electricity Market Arrangements (REMA)?

In the British Energy Security Strategy, the government committed to a comprehensive review to ensure electricity market design is fit for purpose as the electricity system decarbonises. 

Announced in April 2022, REMA looks to address long-standing inefficiencies of the energy market design in Great Britain. 

The government has committed to decarbonising the electricity system by 2035. In support of reaching this target, REMA considers changes from the mid-2020s onwards. 

In 2022, the first REMA consultation was launched to identify the required reforms, covering all electricity-related (non-retail) markets: wholesale markets, low carbon power, flexibility, capacity and system operability. 

According to the Department for Energy Security and Net Zero (DESNZ), this first consultation and further stakeholder engagement have clarified that a range of underlying market failures and limitations of existing interventions mean the current electricity market framework will not deliver the “secure, clean, low-cost electricity system” required.

What is this second consultation about?

The second consultation seeks views on specific proposals and a short-list of remaining options to set out a clear direction for how electricity market arrangements in Great Britain will need to evolve in the future.

Proposals are set around four key challenges facing electricity markets. These are: 

Challenge 1: Passing through the value of a renewables-based system to consumers

• Retain marginal pricing across the wholesale market and future-proof the Contracts for Difference (CfD) scheme. According to DESNZ, the combination of these two approaches is the best way to decouple gas and electricity prices and enable efficient electricity system operation. 
• Discount Split Market or Green Power Pool options. DESNZ doesn’t consider these deliverable and would not provide additional benefits to consumers even if they could be delivered. 
• Monitor the evolution of the Corporate Power Purchase Agreement (CPPA) market. DESNZ is interested in the potential impacts of REMA reform on the growth and role of that market in driving new low carbon generation. 
• Pursue a cross-cutting approach to incentivising electricity demand reduction. This would be achieved through improving the government’s assessment of the whole system value of demand reduction, and potential strengthening of price signals within electricity and retail markets, complemented by the existing portfolio of energy efficiency policies in downstream markets. 

Challenge 2: Investing to create a renewables-based system at pace

• Commit to retain a CfD-type scheme as the primary and most effective mechanism for driving investment in renewable generation to deliver net-zero.  
• Ensure the CfD scheme is future-proofed by consulting further on a range of reform options. These include moving away from payment based on output (e.g. by deeming CfD payments or moving to a capacity-based CfD), reference price reform, and restricting the percentage of capacity the CfD would cover for any development. 
• Discount a ‘strike price range’ for CfD assets and a ‘revenue cap and floor.’ According to DESNZ, a strike price range would introduce “significant extra risk” for developers, with potentially limited system benefits, while a revenue cap and floor for renewables has “several design flaws that could lead to significant gaming risk or distort incentives for generators to operate efficiently”, leading to consumer detriment.  

Challenge 3: Transitioning away from an unabated gas-based system to a flexible, resilient, decarbonised electricity system

• Retain the Capacity Market as the government’s primary mechanism for ensuring capacity adequacy. A range of alternative options have been discounted as they were found to be less effective. DESNZ will continue to implement shorter-term reforms to the Capacity Market to ensure the scheme continues to support security of supply effectively.
• Progress the development of bespoke policy to support technologies such as Power CCUS, Hydrogen to Power and Long Duration Electricity Storage to mitigate emerging technology risks. This includes plugging current gaps in the government’s policy framework through separate consultations on its minded-to position that a business model to support H2P may be needed and developing a support scheme for LDES. 
• Optimise the Capacity Market by introducing a minimum procurement target (otherwise known as ‘minima’) into the auction to better support investment in low carbon flexible technologies. In the long-term, the consultation document outlines, Optimised Capacity Market should be the primary scheme for supporting the deployment of a competitive mix of low carbon flexibility. Progress of all low carbon flexible technologies in receipt of bespoke support will remain under review until the government has confidence they can compete in an Optimised Capacity Market. 
• Set out updated expectations of the amount of flexibility needed on the electricity system in 2035. Specifically, a range of internal and external models estimate that the electricity system in Great Britain could require up to 55GW of short-duration flexibility and between 30 and 50GW of long-duration flexibility. 
• Develop clear decarbonisation pathways for unabated gas to ensure a glide path to a fully decarbonised electricity system. Based on internal analysis the government expects that “a limited amount” of new gas capacity will be required in the immediate term to ensure a secure and reliable system that avoids blackouts. According to DESNZ, gas is the only mature technology capable of providing sustained flexible capacity whilst low-carbon long-duration alternatives, such as Power CCUS, Hydrogen to Power and Long Duration Electricity Storage scale up.
• Promote sustained investment in the extensive build-out of low carbon flexible capacity and supporting infrastructure to secure electricity supply through to 2035 and beyond. To ensure clear decarbonisation pathways for remaining unabated gas generation, according to DESNZ, greater hydrogen and CO2 infrastructure would need to be available in future. This will require public policy frameworks to leverage private finance. 
• Work with Ofgem, the National Energy System Operator and industry to accelerate progress and reforms within the current market framework to support distributed flexibility, and review whether additional steps are needed. 

Challenge 4: Operating and optimising a renewables-based system, cost-effectively

• Consider strengthening locational signals in the market by assessing two options: zonal pricing (which would send wholesale market participants both locational investment and operational signals); and a set of alternative options (which are likely to primarily send locational investment signals) which could be implemented under current national pricing arrangements. This includes working with Ofgem on reforms to network charging and transmission access in parallel with REMA reforms. 
• Discount nodal pricing due to the impacts it would have on investor confidence and the deliverability of the government’s 2035 decarbonisation targets. 
• Consider centralised dispatch, alongside the option of a reformed Balancing Mechanism. The government will also continue to consider other reforms to existing arrangements, such as shorter settlement periods. 
• Work with National Energy System Operator, Ofgem and wider stakeholders to develop proposals for an electricity system operability strategy for 2035, better forecasting of operability needs and improved emissions reporting by the National Energy System Operator. The government will also investigate perceived barriers to the provision of ancillary services from co-located assets and how alignment of ‘longer-term’ ancillary services with CfD auctions could be achieved. 
• Discount the ‘local markets’ model, which aimed to reorient the wholesale market around local, distribution-level markets. Instead continue to consider what further actions are needed to deliver “open, dynamic and coordinated” markets for distributed low carbon flexibility. 
• Consider further the impacts of REMA reforms on market liquidity. 

Different policy options within each challenge have been assessed against five criteria: value for money, deliverability, investor confidence, whole-system flexibility and adaptability. 

What happens next?

This consultation accepts contributions until 7 May 2024. The government will use the responses to inform further policy development and thinking on the best allocation of risk in a renewables-dominated system. 

A summary of responses is expected in summer 2024. DESNZ intends to conclude the policy development phase of the programme by mid-2025 and move into full-scale implementation from 2025 onwards, or earlier where possible. 

Where can I find more information?

More information about this consultation and how to take part is available on the gov.uk website.