Splitting opinion - is splitting the wholesale market the best way to deliver an affordable energy system?
As the statutory advocate for consumers in the energy sector, Citizens Advice is considering how reforms to electricity markets can help to deliver an affordable and sustainable energy system that works for consumers. In the coming months, we will be publishing a series of discussion papers examining these reforms in detail.
One type of reform which has gained a lot of attention is to do with splitting the wholesale electricity market into two. Proponents claim it would reduce the wholesale cost of electricity, make renewables cheaper to build, and allow for a long-term alternative to financial support for people’s bills. Market-splitting proposals are novel ideas that are still in their infancy, and there are a handful of potential models to consider. Some create fully split markets, while others use contracts to decouple electricity prices from gas prices. We have chosen to focus primarily on the Green Power Pool proposal for a dual market developed by Professor Michael Grubb at the UCL Institute for Sustainable Resources, but some consideration is given to alternative proposals.
This discussion paper outlines some of our concerns around how a split wholesale market could be implemented. It is deliberately provocative in places and we welcome feedback on the findings via the following email address: email@example.com. It is intended that by spelling out some of these concerns that they can be better addressed as proposals are developed. We find that:
Expanding the Contracts-for-Difference regime could deliver lower wholesale costs through existing schemes. This would avoid some of the complications posed by physically splitting electricity markets, and reduce the potential of an investment hiatus.
Complications could arise from using targeted renewable energy supply as an alternative to financial support with energy bills. To avoid adverse impacts, targeted supply would have to form part of a wider package of support to ensure affordability.
Better data is needed in order to effectively target long-term support. There remain large problems with identifying households that are in need of support.
In the long-term, innovation is needed to bring down the price of low-carbon flexibility and long-duration storage. This is vital to phase out gas power and avoid prolonged periods of high prices at times when renewables output is low.