Is Britain’s electricity market fit for purpose?

A new discussion paper from Energy Futures Lab investigates if Britain’s electricity market arrangements are delivering against their objectives.

A team of researchers at Imperial College London has published a discussion paper on the energy market reforms introduced by the Energy Act 2013. The Act introduced power market reforms, known as EMR, which established new ways to support low carbon technologies (Contracts for Differences) and ensure there is enough capacity to keep the lights on (the Capacity Market).  EMR has been criticised by recent commentators, sweeping changes were recommended in Dieter Helm’s Cost of Energy Review in 2017, and a 5 year review of EMR is due this year. The paper therefore discusses the pros and cons of EMR and the case for further reform. It  was referenced by the Committee on Climate Change’s 2018 Progress Report to Parliament.

The EMR arrangements have had considerable successes over the last five years. They have ensured that there has always been adequate capacity on the system to meet peak demand and since the allocation of prices for renewable energy technologies moved to an auction basis there have been dramatic falls in the prices paid to wind, solar and other renewables.

These successes, and others, all match up with the objectives of the legislation but is this enough? “The changes introduced in 2013 have just started bearing fruit,” says Dr Robert Gross, the paper’s lead author, “I think we need to stick with the broad framework of EMR but bring in some detailed changes to help ensure that the system is run as cost effectively as possible.”

One of the key issues discussed in the paper is the cost of balancing a system with a lot of renewable energy. For some, these balancing costs are controversial and are not being levied fairly, but the evidence provided by energy modelling studies shows that they remain a small fraction of the total bill paid by consumers. The paper notes that it is possible to reduce these costs through careful changes to balancing and wholesale markets without jettisoning EMR altogether, noting also that variable renewables could make a greater contribution to system balancing.

EMR has also been instrumental in helping halve carbon emissions from electricity generation between 2012 and 2017. There has been substantial growth in wind and solar capacity and the carbon price support mechanism introduced through EMR has contributed to a dramatic reduction in the use of coal power.

“I don’t believe there is yet a strong case for sweeping changes to EMR,” says Dr Gross, “But the work shows we probably need some changes to both the balancing and wholesale markets and we need to take a good look at how Contracts for Difference operate.”

The discussion paper was authored by Dr Rob Gross, Dr Aidan Rhodes and Dr Iain Staffell for Energy Futures Lab. It is part of the preparatory work being done by the team on an upcoming Briefing Paper, which will be a complete review of the electricity market arrangements in the UK. Please sign up for Energy Futures Lab’s mailing list to be kept up to date with the progress of the work and the institute’s other activities.