The Department for Energy Security and Net Zero (DESNZ) published its second consultation on the review of electricity market arrangement (REMA) on 12 March, aiming to set out a direction of travel for how Great Britain’s electricity market arrangements will need to evolve in the future.
The first REMA consultation asked for views on whether alternative market structures could better pass through the value of renewables to consumers, with some options particularly relevant for energy intensive industries (EIIs). However, DESNZ has now dropped them. It has also dropped ‘nodal pricing’, but aims to appraise ‘zonal pricing’ further, though this could actually increase electricity prices for EIIs, risking competitiveness of manufacturers, jobs and opportunities in local economies.
The EIUG thinks that DESNZ’ forecasts of the proportion of hours in the year where unabated gas meets marginal demand will reduce significantly between 2020 and 2035 is overly optimistic and ignores the higher cost of other likely marginal plants, such as gas with CCUS, batteries or even interconnectors.
The consultation underestimates the importance of competitive wholesale electricity prices for all consumers, especially EIIs who face direct competition from countries with much lower wholesale prices. This is evident when it states that it is unclear what the long-term benefits would be for EIIs who are already targeted through existing schemes, such as the schemes to reduce the indirect cost of renewable on EIIs that impact on retail electricity prices.
An EIUG poll about reasons behind the siting of new investments showed that electricity prices are only one driver and did not alone determine investment sitings. Other reasons, such as easy access to raw resources, access to good transport infrastructure and connection to the electricity distribution and/or transmission networks, are equally or even more important. This means that local marginal pricing may not drive new investment by EIIs to the extent that Ofgem and DESNZ think it does. Zonal pricing may therefore increase electricity prices to EIIs, risking jobs and reducing opportunities for a local economy.
Arjan Geveke, Director of the Energy Intensive Users Group, said:
“The second electricity market reform consultation has given up on exploring options that could better pass through the value of renewables to consumers, including energy intensive industries, but risks actually increasing electricity prices by moving to zonal pricing.
“The EIUG does not share the optimistic modelling on how quickly gas power plants will be phased out as price-setter for wholesale power prices. Gas prices – directly or indirectly – are likely to determine the wholesale price for longer than DESNZ hopes, and the electricity wholesale price differential between GB and other countries will continue to remain significant.
“Nodal pricing would have been overly complex and damaging to investors confidence. Nevertheless, the department will continue to consider zonal pricing, assuming that energy intensive industries will simply move to where the cheapest wholesale electricity price is. This denies the complexity of investment decisions in which other reasons, such as easy access to raw resources, access to good transport infrastructure and connection to the electricity distribution and transmission network, are also important. A move to zonal pricing risks increasing electricity prices for energy intensive industries who do not move for these other reasons, thereby increasing electricity cost instead of reducing them”.