Regens response to second REMA consultation: time to focus on progressive market reform

Along with many organisations, Regen has submitted its response to the Review of Energy Market Arrangements (REMA) second consultation.

Our response welcomes the publication of the second REMA consultation as an important milestone towards the development of an efficient GB electricity market and expresses Regen's appreciation of the work done by the REMA team and the progress that has been made.

The response is in two sections:

• Section 1 gives a broad overview Regen response to the overall REMA process and second consultation. It deals with issues around radical vs. progressive market reform and highlights the key considerations for future market reform and enhancements.

• Section 2 deals specifically with the consultation questions.

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In most key areas of the Regen response, we are supportive of the overall REMA direction of travel and the options that have been proposed, including the decision to drop nodal Locational Marginal Pricing and a Split Market option.

The main difference of view, which is shared by the majority of companies and organisations working in the energy sector, is a firm recommendation that DESNZ should drop the zonal pricing option to reduce investor uncertainty and enable resources to focus on other more workable solutions.

The rationale to drop zonal pricing, after two years of REMA development, is that:

• The benefits case presented for zonal pricing is extremely weak and, according to the analysis DESNZ has given, could easily be overturned by a modest increase in the cost of capital.
• The zonal pricing design is still unclear and would, we believe, have a significant impact on other REMA design solutions and allied reforms in retail reform, network charging and the creation of new flexibility markets.
• Investment and implementation risks are significant and are already having a negative impact on investor confidence and on trading conditions.
• There are far better ways to achieve efficient asset siting and market operation, and achieve the four REMA challenges, through a coherent programme of progressive market reform.

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If DESNZ decides to keep zonal pricing as an option, then a lot more work is needed before any design decision can be made. This additional work includes:

• Developing a viable design option for zonal pricing, including key design decisions around zones, dispatch arrangements, level of demand exposure and the treatment of distribution connected assets.
• Presenting a far more robust and credible benefits case based on realistic assumptions and scenarios that are subject to review.
• A full assessment of the investment and on-going commercial risk, and risk mitigation options, including their costs.
• A more detailed analysis of design compatibility and legacy arrangements and their costs.
• Analysing implications for consumers, including distributional impacts and issues of fairness.
• Developing arrangements for forward trading and hedging, including a potential new Financial Transmission Rights market.

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Regen's view is that the benefits of an efficient energy market, and REMA's four challenge objectives, can be better and more quickly achieved through a programme of Progressive Market Reform, based on the foundation of the current national trading market arrangements.

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We have set out some of the key pillars of a progressive market reform agenda in our consultation response and will shortly publish a position paper on this subject. Key areas for reform include:

• A shift towards a more strategic energy system and spatial planning to underpin locational signals.
• Reform network charging to ensure that charges are both cost reflective and aligned with strategic plans.
• Continued enhancement and expansion of the Contracts for Difference (CfD) scheme to accelerate investment and reduce market distortions.
• Changes to the Capacity Market to incentivise a rapid switch to low-carbon flexible and dispatchable generation, and the continued decommissioning of unabated fossil fuels.
• A drive to reduce the occurrence and cost of constraints, including the expansion of flexibility and constraint markets.
• Operational and market reforms in the Balancing Mechanism and control room functions, with significant investment in digitalisation, automation and new markets.
• An overhaul of GB's interconnector strategy and its operation to enable interconnectors to provide balancing and flexibility services. This will require closer working with neighbouring markets.

Regen will continue to work with the REMA team and our industry colleagues over the coming months and we welcome any feedback on our consultation response.

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