Yesterday (12th March 2024), the government released the second consultation on REMA – the Review of Electricity Market Arrangements.
Even whilst the consultation is more focused than the first iteration from 2022, it remains vast in scope, totalling over 160 pages.
PLMR has produced a short briefing consolidating the proposals put forward in the consultation, which you can read here, alongside further analysis and advice on how to engage below.
Why does REMA matter?
Aiming to implement the arrangements necessary for a decarbonised electricity system by 2035, REMA could bring sweeping change to electricity markets.
Key mechanisms, including the Capacity Market and Contracts for Difference, will be reformed to enable the effective operation of a renewables-dominated system. Proposals aim to provide the conditions needed to incentivise investment, whilst encouraging competition between technologies, minimising distortions and securing sufficient liquidity.
There is strong focus placed on how to bring forward sufficient flexible low-carbon capacity to allow the UK to transition away from unabated gas. Proposals to amend the Capacity Market look to introduce a mechanism rewarding low-carbon flexibility, providing a significant incentive to deploy technologies such as LDES, power CCUS, and hydrogen to power.
Whilst the reforms will impact all electricity market participants, a notable aspect of the programme is also the potential impact on consumers.
The most substantial change REMA proposes is to implement a locational pricing system. Despite ruling out more a radical ‘nodal’ system approach, proposals for ‘zonal’ pricing remain, with the government identifying ‘several major benefits’.
Whilst advocates state that this could deliver up to £31 billion in consumer savings between 2025 and 2040, significant concerns remain. A locational system could result in sizable regional variation in energy bills – a so-called ‘postcode lottery’.
The government has promised to ‘engage extensively with market participants in the next phase of the programme to design a viable zonal model’, it is yet to be seen what the largest shake-up to consumer energy bills in decades may look like. Whilst current proposals for the introduction of a zonal pricing from next year (2025) look unlikely, there is ample opportunity to express views to government in the interim.
The politics of REMA
The timing and framing of the release of REMA is noteworthy. Originally promised before Christmas but consistently delayed by ministerial changes, civil servants finalised the consultation content months ago. It shows the importance of Claire Coutinho, the Energy Secretary, and her desire to use the announcement to align with the party’s political goals.
Simultaneously, and also confirmed within the consultation, Coutinho gave a speech mandating the new construction of gas generation facilities. Sunak swiftly backed the statement, commenting “Britain needs to reach our 2035 goals in a sustainable way that doesn’t leave people without energy on a cloudy, windless day. I will not gamble with our energy security”.
The Conservative emphasis on security and pragmatism aims to draw a dividing line with the Labour party. Sunak and Coutinho are working to portray themselves as a ‘secure hand’ making realistic decisions for the country – in contrast, they position Labour as ‘gambling’ away money and security with their 2030 clean energy mission.
This has been an enduring PR strategy for the party: focusing on the role of realism – and oil & gas – in a future power market while glossing over the more radical policy reforms being proposed, such as nodal pricing. This juxtaposition has seen notable pushback from commentators, with some claiming it risks sending a confusing message to investors.
How to engage with REMA
This is a crucial time for those operating in the electricity sector to engage with both government and opposition.
With consultation responses due in May and implementation commencing in 2025, it will be the next government taking forward these reforms – which may well be a Labour administration. Organisations need to be engaging with decision-makers on both sides of the political spectrum now.
REMA is also just one part of the sweeping market reform taking place across the sector. Grid and network improvements, consultations on bespoke support mechanisms for low-carbon technologies and further change to the CfD and CM schemes will inform, and be informed by, REMA.
It is imperative that organisations looking to engage on REMA take a holistic view and are responding to a number of different consultations and policies from government.
PLMR is well-placed to help you position yourself for success during this highly transformative time. If you would like our support, or further information, please contact amy.colwell@plmr.co.uk.
