Reforming electricity markets for low-cost and low carbon power

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Europe is in the middle of a cost-of-living crisis. In the midst of that, how do we navigate the energy crisis? Could it impede or accelerate decarbonisation? The UCL Institute for Sustainable Resources have collaborated with Aldersgate Group to map out reform of energy markets and the key proposal of a 'Green Power Pool'.  

The ongoing energy crisis has had major economic impacts for UK industries and households, pushing prices up by over 80% and fuelling the cost-of-living crisis and inflation.  Although Britain generates as much electricity from renewables as it does from gas, a problem with the current power market means that the falling cost of renewables is not reflected in bills. As the most expensive generator needed to meet the last bit of demand, gas sets the price in Britain’s wholesale market – even for most of those on ‘green’ tariffs.

That is why University College London, with support from the Aldersgate Group and the Institute for New Economic Thinking, have partnered on this programme of research on electricity market reform, power sector decarbonisation, and measures to reduce electricity prices to facilitate the electrification of the UK economy. We prioritised four 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.  Our first stakeholder report, ‘A zero-carbon power grid and the electrification of heavy industry: how to deliver on a twin challenge’, was launched by the Aldersgate group on 27^th April 2023, and was followed by a study of options for tariff reform, published on 19^th September 2023.

Publications

Aldersgate / UCL Reports

Navigating the energy-climate crisis working papers

Relevant stakeholder reports from our earlier research

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, but with little or no ‘dispatchable’ response to short-run price fluctuations. Moreover, their average costs over the past decade or so have become much cheaper than fossil fuel-based electricity (NECC #3). This means that under current market arrangements, and with very high natural gas prices, electricity consumers are now paying much more than the average cost of generation (NECC #2).

One proposal is 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(1). 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'(2), 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'(3), both supported by the Aldersgate Group. Variants on the idea are under consideration in the UK Government’s Review of Electricity Market Arrangements (REMA), launched in July 2022, which will identify reforms needed to transition to a decarbonised, cost effective and secure electricity system.

Below you will find a growing series of publications focusing first on different elements of the problem, and then on how options for reform – focusing on a Green Power Pool – may effectively address them.

References

1. Electricity market design during the Energy Transition and the Energy Crisis – Issue 136

2. UK Industrial Electricity Prices: Competitiveness in a Low Carbon World

3. 'Delivering Competitive Industrial Electricity Prices in an Era or Transition

Research team

Current research team

Former members

Paul Drummond

Photo credit: Kelly M Lacy / pexels.com