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The problem with existing electricity markets
Electricity markets in Great Britain, the EU and many other parts of the world are based on short-run marginal costs, in which fossil fuels set the price (NECC #1). This design works well when the majority of generation is fossil fuel-based but becomes problematic with increasing levels of renewable generation. Renewables are capital-intensive but very cheap to run and have little or no ‘dispatchable’ response to short-run price fluctuations. Moreover, their average costs over the past decade or so have become far cheaper than fossil fuel-based electricity (NECC #3). This means that under current market arrangements, electricity consumers are paying much more than the average cost of generation (NECC #2).
The consequences of operating an electricity market with dated design became particularly acute during the recent energy crisis. Despite Britain generating much of its electricity from renewables, when gas prices soared, electricity prices followed, which triggered a cost-of-living crisis and inflation. British consumers, including those on ‘green’ tariffs, were unable to reap the benefits of our rapidly decarbonising electricity supply.
Our publications
In response, University College London, with support from the Aldersgate Group and the Institute for New Economic Thinking, partnered on a programme of research investigating electricity market reform, power sector decarbonisation, and measures to reduce electricity prices to facilitate the electrification of the UK economy.
Below you will find our working papers that outline the economic fundamentals of the UK’s electricity market design; present key principles for reform; examine the revenues collected by generators during the crisis; and put forward a vanguard proposal for a ‘Green Power Pool’, that would decouple gas and electricity prices, enabling consumers to benefit from the falling costs of renewable energy generation.
Alongside are our two stakeholder reports, ‘A zero-carbon power grid and the electrification of heavy industry: how to deliver on a twin challenge’, launched with the Aldersgate group on 27th April 2023, followed by a study of options for tariff reform, published on 19th September 2023.
Working paper #1: What is the role of natural gas in European electricity prices?
Working paper #2: Where does the money go? An analysis of revenues in the GB power sector during the energy crisis
Working paper #3: Price Inflation, Marginal Cost Pricing, and Principles for Electricity Market Redesign in an Era of Low-Carbon Transition
Working paper #4: Separating electricity from gas prices through Green Power Pools: Design options and evolution
Working paper #5: Regulatory Impact Assessment in an era of energy transition: insights from the UK experience
Working paper #6: Generating surplus: the challenges and opportunities of large-scale renewable deployment
The Green Power Pool
The Green Power Pool proposes to disentangle the current single wholesale electricity market into two: one appropriate to the economics of renewable generation (potentially including other zero carbon, high-capital but low-marginal cost generators), and one for traditional sources like fossil fuel-based generators. The market centred around renewables would involve long-term, fixed-price contracts for generation, based on their average rather than marginal cost of supply, with power sold directly to suppliers or consumers through long-term contracts. This would facilitate access to renewable electricity at a known and more stable price – much lower than currently available through the current single wholesale market, with collective purchasing of back-up and balancing services from the ‘on-demand’ fossil fuel-based wholesale market.
The underlying idea of a Green Power Pool was proposed in the 2018 report ‘UK Industrial Electricity Prices: Competitiveness in a Low Carbon World’, by Michael Grubb and Paul Drummond, and re-stated in the subsequent 2021 Policy Briefing ‘Delivering Competitive Industrial Electricity Prices in an Era or Transition’, both supported by the Aldersgate Group.
Original stakeholder reports
Electricity market design during the Energy Transition and the Energy Crisis – Issue 136
LinkUK Industrial Electricity Prices: Competitiveness in a Low Carbon World
LinkDelivering Competitive Industrial Electricity Prices in an Era of Transition
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