REMA: Government to publish plans to boost energy security and renewables investment

The government is to publish a long-awaited consultation on its proposals to reform the UK’s electricity pricing regime to help meet climate goals and reduce costs for businesses and households.

Later today, Energy Security and Net Zero Strategy Claire Coutinho Coutinho will give a speech in central London to highlight series of proposals set out in the second consultation on the government’s Review of Electricity Market Arrangements (REMA).

The wide-ranging consultation is expected to confirm reports Ministers want to establish a zonal pricing system where wholesale prices vary across the country, based on local levels of energy supply and demand.

Currently, the UK’s energy market operates under a marginal pricing system, whereby all electricity generators get the same price for the power they are selling at any given moment. The spot, or ‘marginal’, price is set by the cost of the most expensive megawatt procured, which for many years has been set by fossil gas plants, as the cost of solar and wind projects has plummeted.

The locational pricing system proposed by government today is designed to encourage the development of renewables projects in more optimal locations around the country, reducing the need for costly and controversial pylon projects and minimising constraint payments when renewables generators are paid not to export their power during periods when supply exceeds demand.

The Department for Energy Security and Net Zero (DESNZ) said that by better matching local energy supply with demand, the REMA reforms could shave £45 off households’ average annual energy bills. The reforms are also expected to incentivise more renewables development in the south east, where demand is highest, and encourage more energy consumers – such as factories and data centres – to locate in Scotland or the south west, where surplus renewables power is available and energy costs would therefore be lower.

In her address at the Chatham House think tank, Coutinho is expected to hail the importance of the UK securing greater domestic control over power prices in an era where energy supply is being weaponised by foreign governments.

“If we cannot retain control of energy prices, if we cannot protect families and businesses from the threat of future shocks, then we are not really secure,” Coutinho is expected to say. “So, we must be hard-headed about the future of our energy system. We must put national interest over ideology.”

Greg Jackson, CEO and founder of Octopus Energy, hailed the plan to move the UK to a system of locational pricing. “With locational pricing, customers will save hundreds of pounds a year on bills and parts of the UK will see the lowest electricity prices in Europe, attracting new industry and reducing the need for new pylons,” he said. “It’s right that the government is progressing zonal pricing and the energy sector must now work together to get this up and running swiftly so we can attract new industries – from data centres to manufacturing – and customers can benefit from cheaper electricity fast.”

The proposals were also welcomed by Kisha Couchman, deputy director of trade body EnergyUK. “With more of our power generated by a diverse range of clean energy sources and a growing role for flexibility, the energy system has continued to undergo significant change over recent years,” she said. “We welcome the government pressing ahead with ensuring our electricity markets are fit for the future and capable of attracting the billions of pounds of investment we need for power generation, storage, and network infrastructure.

Guy Newey, CEO at Energy Systems Catapult, said that improved locational signals would deliver “significant benefits” for bill payers and companies delivering the energy transition.

“It is increasingly clear that the only way we can get to a Net Zero electricity system in time and without pushing up bills is to move to a market that reflects local supply and demand,” he said. “It is an essential step forward to see government proposing stronger locational signals in the wholesale market through zonal pricing and a strong push for a smarter energy system. While it is disappointing to see nodal pricing ruled out, improved locational signals will deliver significant benefits to consumers and opportunities for innovators.”

However, some renewables developers have warned the proposed reforms could inadvertently undermine investment in new projects, as wind and solar developers could face more volatile prices.

Ana Musat, executive director of policy and engagement at RenewableUK, urged ministers to “consider how the introduction of any locational signals could impact investor confidence and interact with other policy constraints”.

“A move away from national pricing could deter investment just at the point when we need to deploy around 10GW of renewable capacity each year to 2035, increasing the cost of capital and diminishing the overall attractiveness of the UK market,” she said. “In addition, the effectiveness of any locational signal would be severely restricted by resource availability and planning constraints. For example, under a zonal system a developer could be incentivised to build onshore wind around London and the South East, but a de facto ban on onshore wind remains in place in England. Government should prioritise investment in grid buildout and reinforcement over a move to zonal pricing.”

The REMA reforms are also set to include a number of provisions designed to ensure investment in new fossil gas plants as the grid becomes increasingly renewables-dominated.

Commenting on the plans, Prime Minister Rishi Sunak said: “Our record on net zero speaks for itself – the latest stats show that we’re already halfway there, with greenhouse gas emissions 50 per cent lower than in 1990. But we need to reach our 2035 goals in a sustainable way that doesn’t leave people without energy on a cloudy, windless day.”

DESNZ said the reforms would help ensure new fossil gas power stations are delivered, but are built so as to be “net zero ready” – in other words, able to install carbon capture technologies or convert to run on hydrogen in the future.

In her address, Coutinho is to highlight the importance of fossil gas to the grid over the coming decade. “Without gas backing up renewables, we face the genuine prospect of blackouts,” she is expected to say. “Other countries in recent years have been so threatened by supply constraints that they have been forced back to coal.

“There are no easy solutions in energy, only trade-offs. If countries are forced to choose between clean energy and keeping citizens safe and warm, believe me they’ll choose to keep the lights on.”

But Jess Ralston from the ECIU think tank questioned the govenment’s framing of the construction of new gas plants as an energy security measure, given that prices for fossil gas are set internationally.

“The Secretary of State suggesting that if we cannot control energy prices then we are not secure as a country, while announcing new gas power stations, has a real irony about it,” she said. “Anyone paying an energy bill in the past two years knows that the UK doesn’t control the price we pay for gas, that international markets decide.”

Ralston said the government was currently missing a number of opportunities to shore up the UK’s energy security by reducing the country’s exposure to fossil gas. “The North Sea will continue its inevitable decline with or without new licenses leaving us ever more dependent on foreign gas unless we lower demand,” she said. “The UK is going backwards on energy security because of the government fumbling its latest auction for British offshore wind farms, failing on its home insulation schemes and dithering on heat pumps.”  

Juliet Phillips, UK energy programme lead at think tank E3G, said: “The UK remains on track to be a clean power leader by 2030, having overseen continued exponential growth in renewables. However, due to policy failures over the last parliament, the government has missed opportunities to build out the full offshore-wind pipeline, to make gains in energy efficiency, or address clunky network connection times – all factors that mean new gas plants have been announced today. These must come with strict conditions that new plants can be retrofitted with green hydrogen or CCS in the future, to maintain the UK’s clean power leadership. In addition, more political attention is needed to often-over looked power solutions – like long-term storage and demand side flexibility – in order to get the UK off volatile fossil gas imports for good.”

The reforms also come just days after the carbon capture and hydrogen industry expressed disappointment after last week’s Budget failed to provide any clarity on when the support regime for the expanding pipeline of cabon capture and storage (CCS) projects will be finalised. 

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