Can UK Electricity Markets Deliver A Low Carbon Future?

Dr John Rhys, Oxford Institute for Energy Studies

The UK electricity market was designed to satisfy the technical requirement to supply a non-storable commodity – electricity – with a continuously changing consumer load pattern, relying on fossil fuel generating plant with particular cost and operating characteristics.  We question whether it is “fit for purpose” in achieving a low carbon electricity sector, dominated by plant with very different operating characteristics.

A well-functioning market, and its associated regulatory framework, must inter alia

  • induce efficient behaviour from participants, leading to optimal scheduling/ dispatch
  • generate price signals for allocative efficiency in production and consumption
  • internalise the costs of any continuing CO2 emissions
  • deal adequately with the coordination requirements in transmission planning and system operation
  • above all, provide a secure basis for the large scale and long term investments required to move the power sector to near complete decarbonisation

Current market arrangements are likely to fail several of these tests, and are already under criticism in relation to capacity and generation security. The paper will discuss what is needed to induce and finance new investment on a large scale, and also argue that managing a power sector built around a complex mix of various renewables, nuclear, and CCS, with a much higher proportion of flexibly managed demand (eg for battery charging), will require an entirely different approach.

The paper demonstrates the critical role of the power sector in a low carbon economy, explores the problems of conventional market structure and the issues of financing investment, and suggests some alternative policy instruments that preserve the best features of a market approach.

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