Head of Market Development at the ESO, Cian McLeavey-Reville, writes about the recent announcements on the Government's review of electricity market reform

The Department for Energy Security and Net Zero’s publication of the latest stage of the Review of Electricity Market Arrangements (REMA) is fantastic news for Great Britain’s energy transition. The Electricity System Operator (ESO) welcomes the significant progress made in refining options that can deliver positive, impactful reforms for electricity system operation and consumers.   

Reforming Great Britain’s electricity markets presents a huge opportunity to deliver net zero affordably and securely – we will continue to work closely with Ofgem and the Department for Energy Security and Net Zero to ensure all options are analysed appropriately ahead of any final decisions, which will be taken by the Government. 

The Review of Electricity Market Arrangements  

REMA aims to deliver a package of wholesale electricity market design and wider policy reforms that are fit for a net zero future - one that is secure and affordable.  

Although the area has drawn significant debate across the energy sector, reforming electricity markets is one piece of the energy puzzle. To ensure that zero carbon, low-cost electricity generation can transport power from where it’s generated to where it’s needed, Great Britain’s electricity transmission system requires an expansion at unprecedented scale and pace. These changes need to be met with investment in a diverse energy mix which could include long duration energy storage, clean power that can be dispatched flexibly and always on power that can support Great Britain’s strength in renewables.  

None of these changes can be delivered in isolation if consumers are to realise their full benefits. Strategic energy planning, across markets, resources and networks is required to ensure that energy decision-making is coordinated. 

Britain’s electricity market must transform at pace  

The GB electricity market was designed at a time when the generation mix was dominated by a small number of large fossil fuel plants that were not impacted by weather changes.  

Today, clean generation such as offshore wind is often located in areas of low energy demand, far away from big cities where demand is far higher. We are seeing rapid growth in flexible technologies such as storage, interconnectors and a rise in flexible demand across the electricity system.  

These assets need accurate market signals if they are to locate, produce and consume electricity where and when needed. Otherwise consumers are at risk of high costs of balancing the electricity system for years to come.  

Electricity market change can build on Great Britain’s green growth to-date 

We have consistently said that locational pricing within Great Britain can deliver lower costs and incentivise clean, flexible energy technologies to deploy at scale. We therefore welcome the Department’s decision to maintain zonal pricing as an option for Great Britain’s wholesale market design – a framework that has proven to be effective in several countries worldwide. 

Zonal pricing could introduce many of the missing signals in today’s market, driving more efficient investment and operation across the system. Separate analyses commissioned by both DESNZ and Ofgem show consumer savings from zonal pricing of £15-50bn over a 15-20 year period.  

Zonal pricing could bring secondary benefits, with lower electricity prices encouraging more competitive production of green hydrogen in Scotland and northern England. These lower costs could prove crucial for green growth and for the decarbonisation of high temperature manufacturing industries in Great Britain, including glass, cement and ceramics. Lower costs could encourage other high demand users, such as data centres, to build in these geographies.  

Market reforms must accelerate investment and deliver a just transition 

Any reforms to the electricity market must not slow down the necessary pace of investment required to achieve net zero. The ESO commissioned independent research with investors on the impact of REMA on investor confidence. While the results were mixed, investors with a higher risk appetite were more accepting of zonal pricing, and most found non-market alternatives to be less attractive.  

The biggest concern expressed by investors was that the outcome of REMA is still uncertain, making it difficult for them to react and plan. So it is vital that REMA delivers its recommendation as quickly as possible.  

To maintain investor confidence, it is crucial that investment policy (the CfD) is designed effectively, and that existing investment is protected. We welcome the Department for Energy Security and Net Zero’s commitment to future proofing the CfD, encouraging continued investment in Great Britain’s green transition. 

We are mindful that any market reform will inevitably cause some disruption. However, this is our chance to get the market design right for net zero. Not doing so risks achieving our decarbonisation targets at all.  

The ESO will continue its collaboration with the Government, Ofgem and industry to make REMA a success and ensure Britain can keep building to deliver net zero.