Decoupling renewables from gas-fired power prices considered in UK electricity market review

Jack Grant

18-Jul-2022

LONDON (ICIS)–Market sources have questioned whether the UK government’s announced consultation on wholesale electricity market reform can deliver significant, feasible change with lack of “genuine consideration of the actual practicalities of implementing such change to electricity markets”.

The Review of Electricity Markets (REMA) proposals announced on Monday outline that the initial consultation will include exploring changes to the wholesale electricity market that would attempt to prevent volatile gas prices setting the price of electricity produced by cheaper renewables in a decoupling method, with the intention to lower consumer bills.

The consultation focuses primarily on long term solutions to the reform of the electricity market to ensure it is fit for purpose as the electricity sector continues to decarbonise. It is also aiming to resolve the impact of short-term volatile energy prices to consumers through government support already announced.

MARKET CHALLENGES

There are two primary compatibility issues associated with the existing market framework.

The first is the marginal price challenge, where even if only a small volume of gas generation is needed, that relatively costly power source sets the price for the whole electricity market, potentially leading to higher than necessary costs for consumers and high returns to investors.

The second challenge in the UK is focused on the lack of granular market signals. The rapid growth of renewables will mean the cheapest sources of clean power are likely to be increasingly concentrated in Scotland, away from large demand centres to the south of the country.

Increased network infrastructure can help tackle this challenge but is costly to develop. In addition, these locational constraints mean the system operator will have to actively intervene to balance the system, and frequently curtail clean power generation in constrained areas.

CONSULTATION OPTIONS AND INTERVENTIONS

One of the key interventions outlined in the REMA focuses on decoupling renewables from the power prices based on fossil fuels in attempts to prevent volatile gas prices setting the price of electricity.

One market source said “decoupling of renewables from the wholesale market sounds great but how do you lock people into that lower price? Many wind generators already have PPAs in place or have taken alternative hedging options, many for years ahead”.

The same source added “to only pay a lower price for wind, you have to essentially lock them into a Contract for Difference (CfD) because newer sites are already on CfD’s so are arguably already decoupled from the wholesale price. Renewable obligation certificate sites will have hedged their exposure in most cases so to enter into a CfD. That will be different for every site and surely will need to be negotiated thoroughly”.

Some of the options making up the REMA include introducing incentives for consumers to draw energy from the grid at cheaper rates when demand is low or there is particularly high renewable production.

A different market source said “incentives for customers to draw energy from the grid at cheaper rates when demand is low – surely prices do this already, for example, overnight is cheaper than the peaks for a reason. This is not outstanding reform.”

Another option outlined by government is centred on reforming the capacity market so that it increases the participation of low carbon flexibility technologies, such as electricity storage, which would theoretically lower domestic gas demand as the requirement for gas as a backup to cover the intermittent nature of renewables would reduce with storage.

However, “the issues the UK have are not manageable via battery storage; if we want pump storage, the government need to just go out and support it. Realistically we need dispatchable plants and the capacity market has never provided that”, said the same market source.

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