The UK’s future power market must deliver a rapid expansion in generation capacity, including a continuing role for the Contracts for Difference and Capacity Market mechanisms but with evolutionary changes to ensure they remain fit for purpose, according to a new report from Energy UK.
The report – ‘The Future of the UK Power Market’ – also stresses that significant increases in the demand for clean power over the coming decades will also require a stable environment to attract the necessary investment in infrastructure.
It said that evolutionary changes to the CfD regime should include limiting the impact of the scheme on the wholesale market to improve price signals for efficient dispatch and improving foresight on the volume to be procured by publishing a CfD procurement Strategy out to 2030, ahead of Allocation Round 5.
There should also be a greater focus on supporting sustainable supply chain investment through collaboration across the sector, and repowering, refurbishment and life extensions to ensure a cost-effective delivery of low-carbon electricity.
Access to market through merchant models should be incentivised by removing barriers to power purchase agreements.
Changes recommended to the capacity market (CM) include aligning it with net zero, driving procurement in some low-carbon technologies based on the capacity they provide and simplifying the administrative process for participation and the CM penalty regime by reviewing the overall package of pre-qualification processes, non-delivery penalties, termination fees, and secondary trading.
The report also said that the future should see a dynamic energy system that incentivises flexible technologies.
“These will be crucial to ensuring the country makes the most efficient and cost-effective use of its generation but the current framework does not incentivise sufficient investment in – and development of – these technologies,” the report said.
In order to reduce future system costs, reform of the wholesale market could improve efficiency and minimise system costs.
This could first be achieved by incremental changes, such as to charging, while carefully assessing the evidence for longer-term reform such as locational pricing, the report said.
Energy UK deputy director Adam Berman said: “The electricity sector is in a period of profound change.
The rapid expansion of low-cost renewables has created massive opportunities for decarbonising the sector whilst bringing with it the challenges of managing variability.
Without sensible reforms to the power market, the UK will risk not achieving its climate and energy security targets.
“We need to ensure that the design of the power market is fit for a future where we need to meet a huge increase in the demand for electricity, reach ambitious energy security and climate change targets, and have the flexibility to get the maximum benefit from our low-cost renewable generation.
“Crucially, any reforms need to ensure that the planned £100 billion of industry investment this decade isn’t called into question.
“Reforms which lead to increases in the cost of investment, or investment delays, will make it harder to reach the government’s ambitious targets.
“These are all challenges the forthcoming government review needs to address so we’ve worked to set out some initial priorities and proposals.
“While clearly required, reform – and particularly fundamental long-term reform – will need to be meticulously analysed and considered to ensure it delivers what it is required.”