Pricing
21 Mar 2024
Wendel Hortop

The return of REMA: five takeaways from the second consultation

The second consultation on the Review of Electricity Markets Arrangements (REMA) was released on March 12th, 2024. This highly anticipated publication includes greater detail on what Great Britain’s future electricity market may look like. In this article, we summarise the key takeaways from the consultation and how they could impact battery energy storage.

The five headlines

  • Zonal pricing is the remaining option for locational wholesale price signals after nodal is ruled out.
  • Shorter-duration settlement periods remain in consideration, which could benefit batteries.
  • Capacity Market will be reformed to procure low-carbon flexible capacity with the potential for multiple different procurement targets.
  • Other support schemes for long-duration low-carbon flexibility will operate as a transitional tool.
  • Contracts for Difference scheme will be reformed to ensure renewable capacity operates in a way that supports the system.

1. Nodal price is out, zonal pricing is in

Summary: Nodal pricing has been rejected as a future market design, with the remaining locational option a move to zonal pricing. This would split the wholesale market into around five to ten pricing zones. A national price with alternative locational signals remains an option.

Potential impact for batteries: Major - a shift to zonal pricing would create different revenue potential by zone

The first REMA consultation included a focus on ‘nodal’ pricing, or Locational Marginal Pricing (LMP). This has now been rejected based on the difficulty of implementation alongside potential impacts on investor confidence. However locational pricing remains a focus through an option of moving to ‘zonal’ pricing.

The next phase of REMA will focus on a more detailed design of a zonal pricing model. This will then be assessed versus a national pricing model. There is currently no proposal for the number of zones - increasing the number of these increases the complexity of operation, and could require a move to central dispatch.

Locational wholesale pricing could help solve the growing problem of managing wind generation flowing from Scotland into England. It also could improve the operation of storage and interconnections within these zones. It can also deliver lower wholesale power costs by reducing ‘inframarginal rents’. This is essentially the difference in value generators get between their run cost and the power price.

Press releases suggest there is significant momentum behind a move to zonal pricing, with potential consumer savings as the biggest driver. The consultation highlights potential system savings of £5-15bn but up to £60bn in consumer savings from a move to zonal pricing.

A move to zonal pricing could take up to five years to implement. With a timeline of final REMA outputs in summer 2025, this means any wholesale market reform is unlikely to occur before 2030.

2. Shorter settlement periods get more likely

Summary: A move to shorter settlement periods (5 or 15 minutes) than the current 30 minutes is an avenue REMA will continue to explore. A reduction in gate closure period is rejected from further exploration within this reform work.

Potential impact for batteries: Major - a shift to shorter settlement periods could lead to sharper price signals and improved returns

REMA identifies a need to improve time-based, or ‘temporal’, signals in order to incentivize optimal operation of flexibility. Two different avenues are highlighted to improve this: shortening settlement periods (currently 30 minutes), and shortening gate closure (currently 1 hour).

In the first consultation, these changes received little attention compared to the possibility of locational prices. However, this temporal element received more attention in the second release.

Shortening settlement periods, to as low as 5 minutes, would create a more ‘granular’ wholesale market signal. This enables both generation and demand to more closely match their PNs with actual output, which reduces the need for re-dispatch in the Balancing Mechanism. Evidence from other markets, such as Australia, suggests that a shift to shorter settlement periods should benefit technologies that can change output in short timescales, such as battery storage.

Reducing gate closure, to 30 minutes for example, would increase the accuracy of FPN submissions as they can occur closer to real-time. Again, this should reduce the need for actions in the Balancing Mechanism. However, potential risks to the operation of the system are highlighted, with reduced gate closure limiting the ability of ESO to manage the system. Because of this, a reduction in gate closure has been rejected as part of the REMA reforms.

3. Reforms to the Capacity Market but it remains the primary tool for ensuring security of supply

Summary: The Capacity Market remains the primary mechanism to ensure adequate capacity can meet demand. Reforms are needed however to ensure the capacity it secures works within the net-zero transition. The most likely route is through introducing minimum targets for certain types of capacity, such as low-carbon.

Potential impact for batteries: Major - an optimized Capacity Market could lead to higher prices available for battery energy storage

The headline that accompanied the release of the second REMA consultation was that new gas generation would be built to ensure continued security of supply. The consultation does not comment on this specifically. It instead focuses on how the Capacity Market will remain the tool to incentivize new generation.

This will be achieved by moving to an optimized Capacity Market. This will be a single auction with minimum requirements for different capabilities (or ‘minima’), with potentially different prices for each. For example, within an overall capacity requirement, there would be a requirement for a certain amount of low-carbon capacity that can respond within a certain speed, or for a sustained period of time.

This could provide higher prices to low-carbon technologies, helping to bring new battery capacity online, alongside longer-duration flexibility. More information on the minima design is provided in a report published by DESNZ last year.

Alongside this is a need to update the reliability standard used for setting capacity market targets. Stress events are expected to align more with weather, and are increasingly likely to occur outside of peak demand periods. This will likely also require changes to the current derated methodology.

Finally, emissions limits introduced in last year’s Capacity Market review have been pushed back until auctions in 2026 at the earliest. This would essentially cap running hours for newly built fossil-fuel emitting plants from 2034 onwards.

4. Other policies for advancing low-carbon flexibility are happening outside of REMA

Summary: The Capacity Market remains the primary mechanism to ensure adequate capacity can meet demand. Reforms are needed however to ensure the capacity it secures works within the net-zero transition. The most likely route is through introducing minimum targets for certain types of capacity, such as low-carbon.

Potential impact for batteries: Minor to major - these schemes may not directly impact batteries but would compete within a wider market, especially long-duration energy storage

Whilst REMA focuses on the long-term market structure through which all technologies will participate, three different support schemes have been announced to incentivize long-duration low-carbon flexibility. These have been consulted on separately and each is being advanced by their own dedicated team.

  1. Long-duration energy storage (LDES) cap and floor mechanism
  2. Support for the deployment of hydrogen to power (H2P)
  3. Dispatchable Power Agreements for carbon capture, utilization, and storage (CCUS)

Critically, the current proposal within the LDES cap and floor mechanism specifically excludes lithium-ion technologies from participating.

The objective of these schemes is to support the first commercial-scale applications of each. This support should transition to the Capacity Market in the long term once reforms are implemented.

5. CfD reform is needed to ensure new renewable capacity can respond to system needs

Summary: Reforms to the Contracts for Difference (CfD) scheme will ensure it can support significant growth in renewable capacity, whilst ensuring that this capacity operates in a way that supports system needs. This would see a move away from the current payment against metered generation.

Potential impact for batteries: Minor - this scheme does not directly impact battery energy storage but changes would lead to a reduction in negatively priced periods

The CfD scheme has provided contracts for over 30GW of renewable capacity since its launch in 2014, and the scheme will remain the main tool the government uses to bring online new renewable capacity. However, reforms are needed to ensure it can deliver the scale required.

The CfD guarantees a fixed price for generation, however in the future renewable projects may struggle to sell power during periods of oversupply. This guarantee also removes any time or location-based incentives for the operation of renewables. Projects instead maximize their output at all times (or at least while prices are greater than zero).

The second REMA consultation discusses reforms to the way the CfD operates to ensure these problems do not grow out of control as more and more capacity is contracted under the scheme.

The proposal is to delink CfD payments from what is actually generated - either via a capacity payment (with availability-based monitoring), or a ‘deemed’ payment (where projects are paid based on the maximum they could have generated). These would incentivize renewables to self-curtail, taking this out of the Balancing Mechanism. A capacity-based CfD is suggested to be more suitable if a move to zonal prices occurs.

It is expected that a final decision on future CfD policy will be made by mid-2025, with reforms in place ahead of Allocation Round 9 (the auction due to take place in 2026).

Responses to the second REMA consultation are now open

Responses to the consultation are open until May 8th, 2024. A summary of responses is expected in summer 2024, with policy development concluded by summer 2025. Implementation will follow, or start earlier if possible.