Review of Electricity Market Arrangements

Consultation Response

Credits — Common Weal Energy Policy Group

Overview

A Common Weal Response to the UK Government’s consultation on the reform of electricity markets.

Common Weal welcomes the consultation on Reform of Electricity Markets Arrangements (REMA) as the Present Market Arrangements are unsuited to a rapid and cost effective transition to a Net Zero energy system.

This problem has been highlighted this year by the enormous rise in the cost of gas and electricity which has forced the UK Government to place a cap on the retail and commercial price of both Gas and Electricity at significant cost to the exchequer. However, it would be wrong to place the overall blame on external factors such as the disruption to the gas supply to Europe caused by Russia’s war with Ukraine. Many factors increasing instability have become built into the system for some time by political decisions. As not all of these factors are being consulted in this or other consultations we feel it necessary to list them in this preface.

In no particular order of significance they are:

― The ban on permitting more On-Shore wind farms in England the cheapest form of renewables introduced by David Cameron in 2018 and only partially reversed in March 2022 by Boris Johnson.

― The sudden withdrawal of subsidies for solar energy in 2017 which resulted in the collapse of the amount installed by 83% at a time when the reduction in costs was having a real effect.

― The lack of instruction to British Gas and Centrica to maintain a secure strategic supply of underground gas storage sites which made the UK much more vulnerable to a shortage of supply and or sharp rise in gas prices. Indeed the reversal of this policy this summer has come too late to ensure supply over the winter.

― The very limited action on home improvements in both Scotland and the rest of the UK which results in the continued use of gas as the main source of heating thereby adding to the amount of carbon dioxide emitted.

― There is an urgent need to decide and implement pathways to the decarbonisation of heat, to ensure the country meets decarbonisation goals at least cost, without expensive stranded assets.

― The sale of the British National Oil Corporation/Britoil which potentially prevented the build up of a sovereign wealth fund, eg like Norway’s.

― The privatisation of the nationalised Gas and Electricity companies under Thatcher which resulted in a lack of long term planning and strategic investment by Government.

― The short sighted decision in early 2022 to allow the early shutdown of Hinkley B nuclear plant at a time when the supply shortages as a result of Ukraine were imminent.

Beyond these matters we agree with the consultation authors that the current market arrangements are not working and that they continue to reward fossil fuel consumption and disadvantage renewable production. The current marginal cost based approach to pricing is based on the physics of 20th century generation technology, where increasing output is associated with increasing cost.

Fixing these issues requires a comprehensive review of all the market mechanisms and a review in parallel of arrangements for gas and hydrogen storage are much needed.

We are concerned that the ownership of the electricity and gas network is not included in the review.

We also believe the effective price cap introduced until the next election should be maintained.

We also believe that the price of energy in the producer parts of the country, particularly Scotland, should be lower to reflect them being closer to low cost units of production and to reflect the lower use of transmission infrastructure.