The UK’s electricity market arrangements – taking stock of the second REMA consultation

Last month, Shoosmiths hosted a second event with leading industry body,  Regen on REMA, The UK’s Review of Electricity Market Arrangements – Second Consultation, which closed this week.

The event featured insights from Dan Osgood, the director of energy markets and analysis at Department for Energy Security and Net Zero, as well as a number of expert panel discussions around the key parts of the consultation. It brought together key developers and investors to discuss critical topics within the clean energy industry and examining the reform initiatives currently under consideration by the government. Additionally, the event included highlights from Regen’s recent report on forward-thinking market reforms.¹

The Review of Electricity Market Arrangements (REMA), is founded on three pivotal goals that the Government is committed to fulfilling to establish an energy system equipped for the future:

• Advancing the decarbonisation of electricity
• Ensuring the affordability and economic efficiency of energy
• Guaranteeing a reliable supply of energy

In March 2024, the Department of Energy Security and Net Zero (DESNZ) launched the second round of consultations, seeking feedback from a wide range of stakeholders. This was triggered by the broad implications of REMA on various facets, encompassing technical, financial, and policy issues. The theme of the second consultation was on the practicality of implementation and represented a narrowing of focus from the first consultation with some of the more radical options for reform, like nodal pricing, formally ruled out. Even so, an intimidating number of options remain on the table (including zonal pricing), and the proposed timeline for taking decisions on and implementing the final REMA reforms was broadly viewed as “ambitious”, particularly given the looming presence of the upcoming general election.

On the reforms generally, while there can be a general inclination towards maintaining the status quo, changes to the electricity market already mean that doing nothing is not an option.

Here are our key takeaways from the event:

To the extent there was consensus at the event, it leaned towards a series of progressive reforms rather than a sweeping overhaul. Behind this preference was an optimistic look at the trajectory of the UK’s significant strides in decarbonising its electricity markets over the past decade and a desire to build upon it, rather than to start from scratch. One speaker summed this up by noting that the potential risks of radical reform on investor certainty is known and real, so to come down on the side of radical change, there would need to be a compelling demonstration of the benefits over progressive reform.

The energy sector stands at a crossroads of transformation and tradition, and zonal pricing became a useful shorthand for discussing the divergent views on radical reforms. Most agreed that they thought zonal pricing was unlikely to be implemented as part of REMA, but the experts were more divided on whether they thought zonal was gone for good: some saw it as an unnecessary complication, while others saw a potential future role for it in the UK’s future energy system. The difference in viewpoint largely came down to whether less extensive reforms can deliver the ‘local’ signals deemed essential for optimising system design.

A running theme was the need for prudent use of limited expertise and resources during the energy transition. A key example given was the need to focus resources on expanding the market for corporate Power Purchase Agreements (PPAs) to new generation, rather than locking up time and energy revisiting and renegotiating existing ones. As legal advisers in clean energy procurement, we share this view, given that the vast majority of PPAs from the last decade include clauses that could trigger renegotiations if market reforms substantially alter the corporate PPA landscape. If REMA is to be a success, it needs to support and accelerate new energy generation and consumption arrangements, rather than rearranging those which are already settled.

Contract for Difference (CfD) reform remains a cornerstone of REMA. The consultation process has shared data on several unintended and (ultimately) counterproductive market behaviours spurred by current CfDs. The expected significant increase in CfD-backed generation risks embedding these undesirable effects at a systemic level without reform of the CfD. Discussions are underway to recalibrate future rounds, potentially shifting towards capacity-based CfDs to avoid the sole emphasis on maximising production. As with PPAs, there was a recognised risk of reforms impacting on existing projects, and the working assumption is that existing arrangements will be grandfathered to avoid any unintended consequences.

As the nation approaches an election, there’s also optimism that, while the political event will inevitably slow the pace of reform, momentum, it’s unlikely to derail or reverse the course. The reforms under consideration appear to enjoy broad support across the political spectrum, suggesting a shared vision for the UK’s energy future and a realistic view of the challenges facing the energy market.

Despite uncertainties around the final shape of the REMA reforms, it is certain to provide the most significant reform of the UK electricity markets for a generation. As we slowly begin the move from consideration to implementation, over many years, there can be no doubt that reform is essential for the UK to be able to deliver on its net zero goals (which, despite recent movements, remain hugely ambitious). In many ways, these reforms will set the tone for how the energy market will grow and evolve as a system, and there is a lot of heavy lifting to come.

¹ Regen’s own consultation response was published on 8 May, [LINK: Time to focus on progressive market reform – Regen responds to second REMA consultation - Regen]