The Department for Energy Security and Net Zero (DESNZ) originally launched the Review of Electricity Market Arrangements (REMA) in 2022 as a means of cooperating with industry stakeholders to work out how best to reform the energy market for a modern Great Britain.

The energy market, initially designed for an industry reliant on fossil fuels, requires reform to cater for the unpredictability of supply from renewable generators such as wind and solar as well as the greater exposure to external markets.

The auction for Allocation Round 7 (AR7) of the Contracts for Difference (CfD) scheme is due to open later this year and, following stakeholder feedback gathered so far, the government has sought to reassure bidders ahead of AR7 by clarifying the points below:

Wholesale market reform

The government has confirmed that they have not yet decided whether to use reformed national pricing or zonal pricing. It has, however, clarified the possible design and operation of the two pricing options. For national pricing, reforming network charges for the transmission and distribution networks is currently seen as the "lead option" but the government is continuing to consider incremental reforms to National Energy System Operator (NESO)'s balancing arrangements.

For zonal pricing, the government is still considering a possible methodology for setting zonal boundaries and the exact number of zonal boundaries there would be, but it has confirmed it is not considering taking forward centralised dispatch.

Legacy and transitional arrangements

Transition to either pricing model will require arrangements for assets used in generation, transmission, distribution or supply before or after REMA reforms are announced (but before they are implemented).

These cannot be fully detailed until the pricing model is selected, however, the government has insisted that agreements under AR7 will be treated in the same way as existing CfD agreements in respect of legacy or transitional arrangements. If zonal pricing is later introduced, existing and future CfDs would use the reference price for the local zone for that CfD.

Reforms to the CfD scheme

DESNZ continues to assess the responses to REMA's second consultation (which closed on 7 May 2024). The output-based CfD currently used remains on the table for the future and will continue unless the consumer benefits will "outweigh any costs, risks and disruptions of making those changes".

Again, the government has confirmed that, whatever reforms are adopted as a result of REMA, amendments to the CfD scheme will "not be implemented until AR9 at the earliest."

Transition from unabated gas to low-carbon flexibility

The government has also set out reforms to unabated gas in the Clean Power 2030 Action Plan but has clarified that "a novel out-of-the-market" mechanism may be deployed to manage the phasing out of unabated gas in the future where gas capacity is at sufficiently low levels.

DESNZ thinks that current proposed reforms are sufficient for the time being, but it will continue to monitor low-carbon long-duration flexible technologies and whether market arrangements will need to be altered to aid the phase out of unabated gas.

What's next?

DESNZ aims to finalise the policy development phase of REMA by mid-2025 and the timetable for REMA decisions will align with the timetable for AR7. This, plus the above, hopefully will give some comfort to potential bidders for AR7 that were unsure at what price they might be bidding.

If you have any questions on CfDs or energy market reforms our team of Energy experts can help. Please contact James Stanier or Russell Evans for more information.