The government is consulting on the UK’s biggest electricity market reform in a generation, potentially opening the door to location-based electricity prices and new rewards for ‘flexible’ energy users. 

The newly-launched Review of Electricity Market Arrangements (REMA) will seek views on a wide range of options to address the combined challenges of responding to higher global energy costs, the need to boost energy security and move the UK to a cleaner energy system. 

Some of the changes being consulted on include: 

  • Introducing incentives for consumers to draw energy from the grid at cheaper rates when demand is low or it’s particularly sunny and windy 
  • Reforming the capacity market (a payment system designed to ensure reliable electricity capacity is always available) so that it increases the participation of low carbon flexibility technologies, such as electricity storage, that enable a cleaner, lower cost system 
  • De-coupling costly global fossil fuel prices from electricity produced by cheaper renewables, a system recently described by the Prime Minister as “frankly ludicrous”.  

Under the current electricity pricing system, gas prices generally end up setting the wholesale electricity price because it is often the last source of supply to meet demand. The consultation will explore ways to update this outdated pricing mechanism to better reflect the real costs of cheaper renewable electricity on the grid.  

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Locational pricing and rewarding flexibility

For example, a single wholesale electricity price could potentially be replaced by varying prices according to location, with lower costs for those near to where green energy is being generated or stored. This approach was recently endorsed by the National Grid and is already used in some parts of the USA, New Zealand and Canada.  
 
Policymakers will also explore the way the system rewards energy users for ‘flexing’ their consumption away from the grid peak times (for example through reducing consumption or using on-site solar or battery storage), by regularly updating prices for peak and off-peak demand and supporting the rollout of smart digital technologies that autonomously respond to pricing signals. This will help to balance power demand, which is expected to at least double over the next 13 years. 

‘Profound transformation over the next decade’ 

The government says it will engage extensively with the energy sector to develop and assess options for reform, with an initial response expected to be published this winter.  
 
Barnaby Wharton, director of RenewableUK’s Future Electricity Systems, said: “The electricity system will go through a profound transformation over the next decade as we continue to expand our renewables capacity. It’s vital that we have a market which supports investments in new projects and infrastructure and allows consumers to get the full benefits of a low cost, low carbon system. 
 
“This consultation is an important step forward in that process, and the industry will continue to work closely with government on building the clean energy system which the UK needs to reach net zero as fast as possible.”  

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