REMA: showstopper worthy of a Paul Hollywood handshake or soggy-bottomed mess?

By Sarah Honan (Flexibility Policy Manager) and Joanne Wade (Strategic Chief Advisor)

The Great British Bake Off is back on our screens, so maybe now is the time to take a fresh look at REMA (Review of Electricity Markets Arrangements) through a set of Prue Leith specs!

Can we compare a fit-for-purpose electricity grid with a series-winning showstopper? I think we can. Whether we are baking that award-winning cake or designing our future energy system, we need the right ingredients, combined with skill and attention to detail. But just putting the right pieces together in the right way won’t be enough. To be a star baker, you need to be innovative and you need to produce something that looks good too. And to transform our electricity system, we are going to need to think differently and produce something that appeals to everyone who needs to be an active participant.

Innovate; combine the right ingredients with skill and care; make it attractive. This is the recipe for success; so do we have this with REMA?

REMA is certainly giving us the opportunity to innovate, and we have taken up this challenge at the Association for Decentralised Energy (ADE), working with our members and other stakeholders to develop our ideas for the most effective way forward.

Getting the recipe right

We asked ourselves, ‘will REMA combine the right ingredients, in the right quantities, to produce the best possible future system?’. We don’t think it does, yet. It’s like we’ve paid close attention to getting the right amount of sugar, flour and eggs, but we’ve skimped on the baking powder and the milk.

Within the REMA proposals, much emphasis has been placed on the potential introduction of locational marginal pricing and potential changes to subsidy mechanisms, to the detriment of robust analysis of the reforms needed for balancing. Just as we must keep sweetness and decadence harmonious in baking, so too must we keep supply and demand synchronised in the electricity grid – this is called balancing. Every day, every hour, every minute, electricity supply and demand must be matched, or balanced, whether it’s a spike in demand because of the Bake Off final or a drop in generation as the sun sets across our fields of solar panels. Efficient and effective balancing is vital to the future operation of the electricity system, just as baking powder is vital to a cake, and the current balancing market is not fit for purpose.

So, what are the missing ingredients that would deliver the balancing market that we need? We think there are five:

Decarbonised balancing
Equal terms for participation in balancing for all assets, regardless of size
Efficient and transparent dispatch decision-making
Grid reinforcement is not the sole answer to physical constraints; flexibility must be a core contributor
Balancing actions against outages are cost effective

To reach a net zero electricity system in 2050, balancing will need to be almost entirely decarbonised which will require, amongst other things, direct interventions in balancing markets.

During the 2020s, we need to consider whether broader carbon policy will affect sufficient carbon price signals within balancing markets. We also need to consider how balancing markets will be opened up to a wider range of net zero technologies, and how to ensure that this supports confidence in investing in market participation. In the longer term, balancing markets must be designed to cope with a much more diverse range of decarbonised assets.

If we are to ensure market depth and efficiency, it is critical that markets are designed in a way that does not discriminate – in theory or in practice – against the millions of distributed energy resources that will be on the system.

During the 2020s, REMA reforms must tackle the current systemic and cultural market barriers in the Electricity System Operator (ESO) and implement accountability mechanisms that ensure successful reform. For the longer-term design of the market, we need to think about how information and money flows in practice to ensure practical non-discrimination and broad market access.

It is vital that the rules and processes that govern the dispatch of flexibility assets are transparent and efficient, enabling providers to reliably forecast revenues and optimise assets.

This will require substantial reform of the ESO’s IT systems. The pace of change must drastically increase and the FSO must demonstrate this step-change before wider REMA reforms can be implemented. For the longer-term, it is vital that the new IT infrastructure developed is adaptable and flexible to unforeseen future needs.

Capacity may increase threefold by 2035 and, to do this cost effectively, flexibility must be a core contributor: increasing system flexibility could avoid upwards of £2 billion in network and connector reinforcement every year.

Grid buildout in the short to medium term cannot keep pace with the capacity coming online and hence balancing costs will continue to rise. This reinforces the need to ensure that markets are as open and efficient as possible through the 2020s. In the longer term, we need to arrive at an enduring approach to constraint management that is cost-effective and fair.

The fundamental transformation of how we produce and use electricity requires a reconsideration of how we incentivise the system to avoid brownouts and blackouts.

We need to better understand the cost limits for preventing loss of load in different circumstances, and how these limits interact not only with the balancing market, but also with wider electricity market design. In the longer-term, we may need further development of value of lost load (VoLL) to better reflect a decarbonised electricity system where scarcity events may be more variable and complex to manage.

Baking the cake

Those are the ingredients, but how do we actually bake effective and efficient balancing into the future electricity system cake?

We considered a range of options that could help to deliver a system based on the five elements above and, from them, designed a package that we think is best able to deliver the necessary change in the short, medium and long term. The strands of this package can be summarised as:

Reform of System Operation: beginning with digitalisation in the short term, progressing through automated self-dispatch with true balancing markets in the medium term, towards a long-term enduring central dispatch mechanism, similar to that employed in Australia. This will support decarbonisation, equal terms for participation, efficient and transparent dispatch, and cost-effectiveness.
Settlement Reform: in the short term, market-wide half hourly settlement is not delayed any longer and other reforms to ensure that markets are equally accessible and rewarding to suppliers and aggregators; and in the medium-term market wide settlement periods are shortened to 15 minutes to ensure price signals more accurately reflect system needs.
Efficient pricing: in the short term, ensuring that the true cost of carbon is sufficiently priced so as to impact balancing markets, the true value of distributed aggregated portfolios is recognised, and in the medium term, that subsidised capacity is incentivised to participate. This will support decarbonisation. In the longer term, reforming the valuation of Loss of Load will support cost-effectiveness of balancing actions.
System-wide optimisation of balancing: in the short to medium term, ensuring that balancing markets are co-optimised across transition and distribution systems will support equal terms for participation, efficient decision making and cost-effectiveness. In the medium to long term, dynamic and harmonised connections and network charges will help deliver equal terms for participation and cost-effectiveness.
Improved management of physical constraints: in addition to dynamic and harmonised connections and network charges, Local Constraint Markets may be used to defer reinforcement in an area of accelerating change, to provide enduring reserve capacity for periodically constrained areas or to provide enduring support for structurally constrained areas. Strategic network reinforcement will nonetheless be needed, in areas that we know will be consistently congested and where this cannot be completely relieved via the use of Local Constraint Markets. Improved management of constraints will support all five of the pillars we defined.

Making it look great

This will give us a system that works, a cake that tastes good if you like. But will it look good; will it attract all the market participants that are needed?

The mass electrification of heat and transport could either burden or bolster the security and cost-efficiency of the electricity system. To ensure the latter, we need to make sure that markets are ready for the emerging technologies that have not yet entered the peculiar world of electricity balancing. Greater confidence that the future market will be a welcoming one will enable these technologies to offer the immense volume of flexibility that we need from them.

We think that the proposals summarised above offer a clear roadmap for reaching efficient system operation. They would also offer the certainty of direction, consistency of delivery and clarity of design that will provide industry and other stakeholders with the confidence needed to invest in flexibility.

So yes, if we get it right, REMA can bake a great electricity system cake and put the icing on it, making it look good to the sectors we need to get involved. Maybe not yet quite delicious enough for the energy user, for the Hollywood handshake, but delivering a showstopper is something that industry can and will do, if REMA bakes a great cake.