Powering the Future - Why the Review of Electricity Market Arrangements is so important

But this is not how the market currently works, with incentives undermining the optimal mix of technologies as economists such as Dieter Helm have pointed out.14 The challenge for the Government is to ensure that Britain’s electricity market rewards projects for the value that they create and penalises them for the costs that they impose on the system (known as “system value”). [...] Analysis from Carbon Brief shows that nearly 90% of the increase in UK energy bills over the last year is due to the rising price of gas.38 As the UK builds more wind farms and solar farms, there will be fewer hours when the price of electricity is set by the price of gas; however, gas prices will still set electricity prices in many hours. [...] The design of gas hedging obligations will have a big impact on the future of the Energy Price Cap (Consideration 6), which is currently the main mechanism that the Government and Ofgem use to encourage hedging by energy suppliers. [...] Unlike the future role of energy suppliers, the role and structure of Ofgem, the ESO and the DNOs is unlikely to significantly impact the optimal design of Great Britain’s electricity market. [...] During the early 2010s, the Electricity Market Reform (EMR) programme increased the Government’s role in the electricity sector by introducing the Capacity Market and Contracts for Difference scheme, both of which are run by the Government.