Electricity Market Design for a Low-carbon Future

This paper considers GB electricity market and network regulatory arrangements in the context of transitioning to a low carbon electricity system. By considering some of the primary features of a low carbon electricity system and building on themes raised by a previous UKERC Supply Theme paper (Baker, 2009), the paper attempts to identify what characteristics an appropriate market and regulatory framework would need to posses. The paper goes on to consider how existing market arrangements perform in these areas and the possible need for change.

The aim of the paper is to contribute to the debate on energy market reform that is now underway. Currently, discussion seems to be focussing primarily on how to ensure adequate investment in low carbon and, in the medium term, conventional generation to meet the UKs climate change and security of supply goals. Delivering the necessary generation capacity is clearly crucial and by reviewing some of the mechanisms that could be used to encourage investment, this paper attempts to contribute in this area. However, the paper also addresses other areas where reform may be required but that have, to date, received less attention; issues such as arrangements to ensure efficient dispatch and energy balancing, efficient mechanisms to deal with network congestion and measures necessary to facilitate demand side participation.

The approach taken by the paper is incremental in nature, focussing on how current market arrangements may need to develop in the coming years, rather than proposing radical change. It is likely that successfully decarbonising the electricity sector may ultimately require a fundamentally different market design and that change, particularly in relation to low-carbon investment, may be requiredsooner rather than later. However, the transition to a low carbon electricity system will be gradual and arguably best served by incremental change in response to demonstrated need.