Ofgem proposes wholesale electricity market reformation

Ofgem has announced potential reforms to transition the UK towards more secure and affordable supplies of home-grown energy.

The proposed reforms come courtesy of the British energy regulator’s Net Zero Britain discussion paper, which sets out options to expedite the net zero transition and achieve Government targets.

The reforms are hoped to enable a smart, flexible system, which has the potential to deliver more than £10 billion ($11.9 billion) a year in savings to customers by 2050. 

The discussion paper identifies two key areas of reform:

• Strategic planning for the energy system by a new independent Future System Operator at a national level and a potentially similar model at a local level
• Potential reforms to the electricity wholesale market, including limiting the price-setting potential of natural gas, which could be done by splitting the wholesale market, and using pricing signals to run the system more efficiently and save customers billions of pounds collectively on their energy bills

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Pricing signals and enabling change

According to the energy regulator, using pricing signals could include moving from setting wholesale electricity prices at a national level to either a regional or local level.

Ofgem has stated that they are also undertaking further work on the benefits and feasibility of this as one of a range of options, to ensure that any changes could benefit all consumers.

These reforms are hoped to enable a smart, flexible system, which has the potential to deliver more than £10 billion ($11.9 billion) a year savings to customers by 2050. 

Jonathan Brearley, chief executive of Ofgem, commented on the release of the discussion paper, citing the harm on consumers of record gas prices and the current cost of living crisis: “We must diversify Britain’s energy supplies away from gas as soon as possible.

“Recent months have demonstrated that the arguments for boosting our energy security and building a home-grown supply have never been stronger. The economics of energy have fundamentally changed with green energy no longer a desirable but costly alternative, instead, it is now the secure, more reliable, and cheaper option. 

“Today’s discussion paper sets out potential reforms to the energy system so customers can benefit from more affordable, homegrown and renewable energy. We’ll now continue our work with BEIS and other stakeholders to further develop proposals.”

This news comes in nine months after the British Government pledged to decarbonise all electricity generation by 2035, subject to security of supply. It subsequently published the British Energy Security Strategy, following Russia’s invasion of Ukraine.

However, existing market, regulatory and institutional arrangements are – according to the regulator – not geared up to running a net zero power system in the most cost-effective way.

Ofgem has further stated how some reforms will take time to develop and implement. Most key decisions are for the Government, including through its review of electricity market arrangements.