Project developers and investors in the UK had eagerly awaited publication of the Review of Electricity Market Arrangements (REMA), billed as the biggest overhaul of the market in decades. However, at a closer look it seems that it's equally (if not more) important to consider what’s not in REMA, rather than what’s in it.
There is a glaring gap in that REMA excludes the actual market design for a significant part of the low carbon assets that are going to be built and operating over the next 10-15 years. BEIS’ consultation makes clear that there will be a string of separate support mechanisms, sitting outside REMA, for assets such as:
In addition, separate contractual revenues are available through existing CfD and Capacity Market regimes (which are being amended through REMA).
The rationale for funding new low carbon technologies to reach Net Zero is clear. However, splitting the market into multiple self-contained subsidy mechanisms with no attempt to interlink them does not make a good market design. As acknowledged by BEIS, there is a risk of fragmenting the market and distorting competition between technologies.
The Government’s own estimates show that first-of-a-kind technology deployment (e.g. next generation nuclear, CCUS) might be up to 6GW per annum for the 10 years leading up to 2035 - which would be 60GW of capacity subsidised on terms outside those considered in REMA. This is not a small amount that could be excluded from the review without significantly distorting the outcomes.
The consultation implies that once these newer technologies are “mature enough”, there is expected to be a transition for competition on a cross-technology basis. While this intention is genuine, it ignores the reality that each of these financing mechanisms is likely to be based on long-term (15+ years) contracts, baking these into the “market” structure in the long term.
Any asset owner will want to understand what are the likely capacity targets, achievable running hours and guaranteed or potential stacked revenues through different mechanisms or markets. This is obviously interlinked to the prospects of competing assets and technologies.
As currently set out, the REMA consultation makes it hard if not impossible to gauge what are the different revenue streams, contract lengths and other terms available for any type of asset – and how these might link to the wholesale price set by the market.
To give an example from just one scheme: under the current CfDs, investors get revenue certainty through a guaranteed ‘strike price’ for every megawatt-hour generated. If this strike price is above the wholesale price of electricity, they must pay the difference back. However, the exact terms on when that requirement bites have changed in the past allocation rounds, and will continue to change further. Knowing these types of terms – i.e. how an asset (yours or a competitor’s) is likely to participate in the market is crucial information when building an investment case.
Investors should therefore request that the Government set out a more comprehensive overview of its plans for support across a range of technologies, rather than excluding these from the remit of this review.
Engaging with the complete market design (which consists of both REMA and the individual subsidy mechanisms) is a better way to manage political and regulatory risk for both existing and new investments. In the absence of clarity from the Government, parties are left to make their own assessments of a range of outcomes with significantly higher levels of uncertainty.