No easy answers in GB electricity market reform

AFRY has qualitatively assessed four options for revised market arrangements in response to the 2nd Review of Electricity Market Arrangements (REMA) consultation. The study found that, while a move to a market with varying prices in different zones could be the best option in the long-term, deliverability of the transition could mean that proceeding with an enhanced market with a single national price is the most attractive option overall.

Key conclusions are:

• Market designs with central dispatch would increase risk for market participants while also facing challenges on deliverability and enduring robustness
• An enhanced national decentralised dispatch market could be the most attractive option overall if all measures identified could be implemented quickly and if the enhancements could achieve a reasonable share of the operational efficiency gains of a zonal market
• Moving to a well-designed decentralised zonal market should provide the most operational efficient outcomes and could be the best enduring solution
• However, a decentralised zonal market should only be implemented if accompanied by an extensive risk management framework and grandfathering of existing rights to deal with wealth transfers

In the context of the investment needed over the next decade, the choice for policy makers between zonal and enhanced national market designs may be quite finely balanced; However, if the ultimate decision is to proceed with a zonal market design, delaying the point at which the transition begins would be the worst of both worlds, both extending the current uncertainty over market arrangements, while also delaying the possible benefits that could ultimately result.

“AFRY’s work has identified two ways forward. One requires international cooperation, and through a series of incremental changes improves the efficiency of the existing scheduling and dispatch arrangements, while managing long term locational risks for investors. However, it's an open question whether this could deliver enough change. The alternative is a more radical option in which we move to a zonal market. That would bring its own set of challenges relating to wealth transfers and managing investor risk, and would require ground-breaking methods to resolve these issues for this to be a viable option. Our work has not found a move to central dispatch under either a zonal or a national market to be preferred way forward” says Stephen Woodhouse, Director at AFRY Management Consulting and market design expert. 

Read the Key Messages and Summary Report here

Sign up for the study webinar on 24 May 2024 at 12pm BST here

Background

AFRY has undertaken a 6-week study, in response to the second Review of Electricity Market Arrangements (REMA) consultation, that was published in March 2024. The study builds on work undertaken in 2022-2023 by AFRY.

The latest study was funded (in whole or in part) by 13 industry members and supported by observers. The views presented represents the independent opinion of AFRY, and the opinions may not be attributed to any of the parties who supported the process.

AFRY Management Consulting works globally on market design and provides commercial analysis, strategic and operational advice for private investors and operators, state owned entities, governments, and regulators with experience of a wide range of global electricity markets, AFRY Management Consulting experts possess a deep insight into the merits of alternative electricity market designs.