Net Zero Market Reform
Our Net Zero Market Reform programme was established in early 2021 to examine holistically the changes to current GB electricity market design that will be required to achieve net zero.
We will continue to share our views on the future direction of market reform, while also working closely with DESNZ as a trusted strategic partner in the Review of Electricity Market Arrangements (REMA).
Please find our recent updates on the programme in the ‘key updates’ section of the webpage below.
The Net Zero Market Reform programme has been split into four phases as follows:
Phase 1– Scoping (completed March 2021)
Analysis of the GB market landscape and review of international case studies. The purpose of this phase was to set out the framework for future phases of work.
Phase 2 – “Case for change” analysis and identification of options (completed November 2021)
Deep dive analysis into current and future market issues, defining market objectives and success criteria with a view to Carbon Budget 6 and net zero, and identification of a long list of market reform options to tackle the issues identified.
Phase 3 – Assess operational elements and share conclusions (completed May 2022)
Evaluation of a range of credible market design options against assessment criteria and sharing of initial findings on the future direction of market reform.
Phase 4 – Assess investment elements and share conclusions with holistic vision for REMA (completed November 2023)
Continuation of our evaluation of a range of credible market design options against assessment criteria and sharing of findings on the future direction of market reform.
Scheduling and dispatch case for change (ongoing)
We are currently working in understanding the case for change to the current scheduling and dispatch arrangements in GB.
To achieve market reform, we need to work together across the energy industry. We host regular events and workshops to give opportunity for stakeholders to provide their input. If you have any questions or to find out how to get involved please email [email protected]
Key updates
Below you can find core updates from the programme so far.
What is scheduling and dispatch?
Scheduling and dispatch are processes undertaken by System Operators and/or market participants to maintain the balance between electricity supply and demand, accounting for network constraints such as congestion and asset production constraints such as the state of charge of a battery.
Scheduling refers to planning processes made by both market parties and System Operators in the hours before delivery. Dispatch describes how much units generate/consume in real-time. There is significant variation in how different countries around the world manage these processes and a wide range of designs for incentivising effective market behaviours and outcomes.
Current GB scheduling and dispatch design:
The current GB market framework was intended to be highly decentralised:
- Trading of wholesale energy occurs over the counter (OTC) and on power exchanges, outside of system operator view.
- An hour before delivery, participants in the Balancing Mechanism (BM) finalise how each unit intends to run for the next 30 minutes and send this plan to the System Operator.
- To resolve energy imbalances and system constraints, the System Operator ‘redispatches’ via bids and offers in the BM, using information provided by units and its own forecasts.
The intention was that removing system operator interference until the last possible moment would best facilitate free price formation and would provide the right environment for innovation.
Under today’s market design, scheduling decisions – when a unit positions itself to be ready to dispatch – are therefore in theory entirely the remit of market parties.
Why is ESO assessing scheduling and dispatch now?
Balancing the system in operational timeframes is more complex than when the current market was introduced: growing system constraints such as thermal congestion are not visible to the market, meaning ESO must take significant corrective action via the Balancing Mechanism (BM) and other services once the wholesale market has closed; the profile of generation and demand is more variable through the day; and a growing portion of the market, which is connected to the distribution network and does not participate in the BM, is ‘invisible’ to ESO.
In this context, ESO cannot securely remain a reactive and residual balancer. ESO is instead taking increasing volumes of scheduling decisions, in two ways:
- Introducing new ancillary service markets: procuring ahead of time can reduce consumer exposure to higher balancing costs, but can introduce inefficiency due to forecast uncertainty.
- Using the Balancing Mechanism: ESO can manage uncertainty in future hours by taking proactive actions in the BM.
We are concerned the growing contradiction between ESO’s de facto role and the intended market framework is leading to significant challenges, including: unnecessarily high balancing costs; impact on competition due to reduced market transparency and predictability; and impact on investment due to perceived unfairness of decision-making in the BM.
Interactions with REMA
DESNZ is continuing to assess options for market reform in its REMA programme. ESO is supporting DESNZ by leading the dispatch workstream which includes options for BM reform.
Case for change
Alongside internal research, we have commissioned consultants Afry to assess whether there is a case for change that current scheduling and dispatch processes are not working as intended, and to explore the impact on market parties and balancing costs. Afry have made some early observations which we are keen to test with wider industry in support of the case for change.
On March 12, we held our first workshop with representatives from several trade bodies in addition to key institutional actors such as Citizens Advice, Elexon and the GB Power Exchanges. The workshop pre-read can be found below. We will continue to engage with industry throughout the spring on our case for change, both through ESO engagement and as part of DESNZ’ wider REMA engagement. The purpose of this engagement is for stakeholders to share whether they agree with our diagnosis and to contribute other issues we may have missed. Following the workshops, we will publish Afry’s report and conclusions. If you would like to know how you can engage, please contact us at [email protected].
Canvassing options for reform
We plan to follow the case for change with a second in-person workshop asking for stakeholder ideas for potential solutions to the issues raised. This is currently planned for late May, after the close of the REMA consultation.
Present co-created list of options
We will use ESO analysis and stakeholder ideas to develop a set of options for how dispatch and balancing outcomes can be improved. These options will account for the different wholesale, access and investment policy options being considered by DESNZ in REMA.
Other related work
In parallel, we are running a project as part of ESO’s Innovation programme to assess the advantages of more co-optimised procurement of energy and ancillary services in the future system. We will seek stakeholder input and feedback on this work over the spring.
Download the case for change pre-read
Download the case for change presentation
Phase 4: assessment and conclusions publication
We’ve published our assessment and conclusions from Phase 4, focusing on assessing investment policies and their packaging with wholesale market reforms. These findings are based on substantial analysis and stakeholder engagement.
On 4 July 2023, we hosted our Net Zero Market Reform Phase 4 conclusions webinar. During the event we presented an overview of the NZMR programme to date, our assessment of investment policy options for net zero, and our conclusions.
We also hosted a panel discussion titled "How should investment policy evolve to support a net zero market," and were joined by James Samworth from Schroders Greencoat, Rachel Fletcher from Octopus Energy, and Andrew McAleavey from Penso Power Ltd. This event will be followed up with a more detailed report in the autumn.
See below the recording from the event, the presentation slides, Q&A, and a more detailed version of the slide pack.
27 February 2023
On 27 February 2023 we published Baringa’s independent assessment of investment policy options and market design packages. As set out in our foreword to their assessment, we commissioned Baringa’s analysis as part of the fourth phase of our NZMR programme and to support the debate around market reform driven by the Government’s Review of Electricity Market Arrangements. We will now be forming our conclusions on holistic market design, which will pull together various analyses including Baringa’s assessment, to be published in Summer 2023.
See below, Baringa’s full assessment with ESO’s foreword.
24-29 November 2022
On 24 and 29 November 2022 we hosted online workshops where our partners at Baringa presented results from their independent assessment of market reform packages. Many thanks to all who participated and shared their views on Baringa’s approach and assessment results, which will inform ESO’s own assessment. This event will be followed up with publication of Baringa’s independent assessment followed later by ESO’s full report in 2023.
See below a summary of the workshops, the recording of Baringa’s presentation, the presentation slide pack, and the pre-read slide pack.
10 October 2022
On 10 October 2022 we submitted our response to BEIS’ Review of Electricity Market Arrangements (REMA) consultation, informed by our Net Zero Market Reform programme analysis. REMA represents the most far-reaching review of energy market arrangements since privatisation. We hugely welcome REMA’s long-term focus and believe its outcomes will be transformative in delivering decarbonisation, system security and value for consumers. We look forward to working with BEIS, Ofgem and the wider industry to help design and deliver the market reform outcomes that REMA has set out to achieve for GB consumers.
28 September 2022
On 28 September 2022 we presented an update on Phase 4 of our Net Zero Market Reform programme at Markets Forum. During the event we presented the evolving context of the energy landscape, a recap on the programme to date, an updated case for change with a focus on investment elements, and our latest thinking on the shaping of Market Reform packages. We also hosted two breakout discussions with industry experts, led by Baringa, where we discussed with stakeholders our approach to package design and an initial overview of our packages.
See below the recording from the event, the presentation slide pack, and Baringa’s approach to packages that we discussed in the breakout sessions.
Phase 4 Update: Presentation Slide Pack
Phase 4 Update: Baringa’s Package Approach (Breakout Session)
24 May 2022
Following our presentation at the Markets Forum in March, on 24 May 2022 we published an update on our Net Zero Market Reform programme which presents our assessment and conclusions from Phase 3.
In this publication we have focused on assessing the operational elements of market design: location and dispatch. These are initial findings, based on substantial analysis and stakeholder engagement.
See below the interactive document, print-ready document and separate supporting evidence annex.
Phase 3 Assessment and Conclusions (Interactive)
22 March 2022
On 22 March 2022 we hosted our Net Zero Market Reform Phase 3 conclusions event. During the event we presented a re-cap of the programme to date, the case for market reform, the outcome of our assessment of the Operation market design options, and our conclusions. We also hosted a panel discussion with industry experts where we discussed our conclusions and answered questions from the audience. This event will be followed up with a detailed report to be published in May.
See below the recording from the event along with a more detailed version of the slides that were presented.
17-18 January 2022
On 17 and 18 January 2022 we hosted our first Net Zero Market Reform events of Phase 3. The objective of these sessions was to share the refined market design options for each of the key market design elements identified in Phase 2. On 17 January we focused on the market design elements that fall under the Operation category and on 18 January we focused on the market design elements that fall under the Investment category.
See below recordings of each event and the slides presented by our project partner FTI consulting during the sessions.
Refined Market Design Options (Operation) – Recording
Refined Market Design Options (Operation) – Slides
18 November 2021
On 18 November 2021 we published an update on our Net Zero Market Reform programme which presents our conclusions from Phase 2. It draws together the results of modelling analysis with insights from ESO experts and external stakeholders. In this publication we identify the key challenges for markets to address on the road to net zero, set out our framework for assessing the different market design alternatives, and present the list of options we are taking forward for detailed consideration in our next phase of work.
See below the interactive document, the print ready document and the recording from the Market Forum event on the same day where we provided an overview of the publication.
Interactive Net Zero Market Reform update
Archive
Watch the recorded presentations from the event by pressing the play icon where available or download material from each session using the link below each image.
Phase 2: Market Design Options Workshop
On 14 September 2021 we hosted a workshop to develop a long list of possible market design options consistent with achieving net zero and to discuss what assessment criteria should be used to assess the relative merits of the different options.
Phase 2: Case for Change Workshops
In July 2021 we hosted three workshops looking at the case for market reform (“case for change”). The workshops focused on investment, flexibility, location, and whether current market design drives the right signals to achieve a net zero energy system.
Phase 2: Markets Forum Presentation
On 22 June 2021 we presented an update on our NZMR programme and our approach to tackling the case for market reform (“case for change”); we also hosted a panel discussion with BEIS and Ofgem on market reform and the associated challenges.
Launch: The Road to Net Zero Electricity Markets
On 25 March 2021 we launched Phase 2 of the Net Zero Market Reform programme, shared key insights from Phase 1 and outlined our high-level plans to progress our review of GB electricity market design.