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Time to start thinking about zero-carbon electricity market design

09 Nov 2021

Around COP26 we’ve heard a lot about the UK’s leadership in offshore wind – and rightly so. The 10GW of offshore wind currently installed in UK waters, represents a third of the world’s current installed capacity, and by the end of the decade this capacity will quadruple with the UK targeting 40GW of offshore wind by 2030.

Importantly, the process of deploying offshore wind at this scale has driven technology costs down, so this initial UK success will mean other countries will soon exceed the UK in terms of absolute offshore wind capacity. The UK’s success will lead to a global success, amplifying the impact of any emissions savings we could have made at home. 

Part of the UK’s success stems from the introduction of the Contracts-for-Difference (CfDs) under Electricity Market Reform or EMR in the early 2010s. CfDs de-risked offshore wind projects by providing a legally robust, government-backed contract assuring a fixed price for output generated over 15 years, thereby reducing the financing costs for large capital-intensive infrastructure. 

The CfD helped companies like SSE to deploy the technology at scale – in our case including the 3.6GW Dogger Bank offshore wind farm, a joint venture with Equinor and Eni, which will be largest in the world when built, at record low prices around £40/MWh (2012 prices). 

The CfD will continue to deliver value for consumers in GB in the near term, and versions of it will deploy significant amounts of renewable energy around the world over the next decade. However, to ensure these benefits continue we need to start thinking about how electricity market design will need to evolve to support an electricity system based around zero-marginal cost renewables, first to decarbonise electricity by 2035, and then to grow to decarbonise the rest of the economy through electrification. 

Maintaining the status quo will simply not be the least cost pathway, and recent analysis SSE commissioned from LCP outlined there are up to £20bn in cost savings by 2050 by moving to a electricity market design which values all low carbon generation equally.

This is where we come back to the UK success and ambition on offshore wind – this has put the UK at leading edge of the system integration and market design challenges for variable renewables. We can’t wait to learn from others, it is others who are looking to learn from us. 

The UK Government has committed to considering the need for broader market reforms in its recent Net Zero Strategy, having undertaken a Call for Evidence on this topic at the end of 2020. Ultimately it is not a question of ‘if’ an EMR2 will take place, but ‘when’, and the UK Climate Change Committee (CCC) has called for an electricity market reform to be complete by 2023, and it’s a call we would echo too.

The challenge for policymakers is how, and when, to deliver the long-term reforms that are needed while maintaining the current momentum on low-carbon investments. It’s not an easy task, but a clear and predictable timetable for changes will be key. Importantly, we need to do the heavy lifting, or heavy thinking, now.

To help kick-start a discussion on future electricity market design we part-funded some initial analysis from leading academics at the UK Energy Research Centre (UKERC) as part of our COP26 programme.

Published today to coincide with Science & Innovation Day at COP26, UKERC’s initial research – ‘Risk and Investment in Zero-Carbon Electricity Markets’ – looks at different decarbonisation pathways from NG-ESO’s Future Energy Scenarios (FES), including up to 100-120GW of offshore wind by 2040, and then analyses the impact of ‘price cannibalisation’ from aligned wind output on wholesale electricity prices, and what this means for the ‘capture prices’ for offshore wind farms and risks for investment in new offshore wind projects.

The report clearly highlights the benefit of a structure like the CfD in reducing risk for new renewable energy projects and therefore the cost of capital. However, clearly this is only one part of the jigsaw and we need to look right across the electricity system, including how to minimise system costs and maximise the contribution of existing assets. 

While technological developments in floating offshore wind, integrated offshore grids and offshore electrolysis will increase the impact of offshore wind in the UK and internationally, it may be that developing a blueprint for a zero-carbon electricity market design through EMR2 is the most impactful next step the UK can have in supporting decarbonisation of electricity globally.