Too hasty reform of Britain’s £ multi-billion electricity market could deter investors, leading to higher bills, energy analysts Cornwall Insight have advised.
Whitehall is committed to a radical shake-up of how Britain makes and consumes power. “High-level options for reform set out this summer” is the promise of a Review of Electricity Market Arrangements (REMA), contained in the Johnson administration’s energy security strategy, released three weeks ago.
But the respected consultancy firm counsels that reform must retain a strong focus on protecting “investor momentum”, if the government is to meet triple objectives of energy security, net zero, and consumer affordability.
In a new statement Cornwall advise that rushed reform could inflate costs further, embedding and prolonging UK impacts of the world’s twelve-month post-Covid squeeze on gas prices, consumed in heating and in power generation.
Radical options to be considered in the REMA, Cornwall Indight anticipates, will include ideas like pricing power by its distance from the generator, splitting Britain’s market for dispatchable generation away from its evolving market for carbon, and broadening the role of Contracts for Difference.
“Billions of pounds have been invested in the energy transition, and billions more are rapidly required to unlock net zero and energy security”, says Cornwall.
“But it is essential.. market reforms must be based on more than economic and market theory”, the economic advisers say.
Capital gains, capital costs
“The specific backdrop of sunk investment .., the urgency of new investment demanded by the energy security strategy, and how investors price the risk of radical market change are all critical factors”.
Costs of capital borne by generators, investors and other market participants, are one of the biggest uncertainties in achieving much needed reform, according to Cornwall.
“Changes, which in theory are desirable but which in practice create unmanageable investor risks will be self-defeating, just at the time the government wants an acceleration in deployment in sectors such as offshore wind, new nuclear, and hydrogen.
In its March retail highlights Ofgem reported continuing consolidation in terms of supply of power and gas in the quarter to December, with British Gas and EDF taking an extra 1 % share to 70%, at they took over as suppliers of last resort for victims failing after last September.
Other large, medium and small suppliers supplied the remaining 30%.
“It is really important that in our haste for reform, we don’t leave investors behind. Without them progress is impossible”, Cornwall Insight’s CEO Gareth Miller cautions.
Network investment, strategic capacity development, and adaptations to existing policy schemes, alongside wholesale market reform, must all feature in REMA, he urged.
“The GB market has been in an almost continuous cycle of major reform throughout this century whilst still delivering investment and reduced emissions. However, policy implementation needs to move really quickly if the Energy Security Strategy ambition is to be met, and across a very broad agenda”, the consultancy’s boss observes.
“The tightrope here for policymakers is very precarious, and without much of a safety net”.