Soaring energy costs have prompted Governments across the globe to make ambitious policy changes to guarantee affordable energy for consumers and domestic energy security: targeting increased deployment of renewables, funding for commercial hydrogen and driving energy efficiency measures. The UK Government has been no exception. In the British Energy Security Strategy, published earlier this year, the UK Government significantly raised ambitions across the energy system, including building low-carbon technologies such as offshore wind, solar and nuclear. The Strategy acknowledges, however, that scaling-up renewables deployment is only half the challenge. In the Networks, Storage and Flexibility chapter the Government committed to ‘undertaking a comprehensive Review of Electricity Market Arrangements (REMA) in Great Britain, with high-level options for reform set out this summer’.

The last major programme of electricity market reform in the UK was 10 years ago and, as noted by then-Secretary of State Kwasi Kwarteng, this left key parts of the market structure unchanged from the time when large fossil fuelled generators were the dominant source of electricity[1]. Clearly, to achieve the British Energy Security Strategy aim of total power sector decarbonisation by 2035, it is time to look again at whether market arrangements are fit for purpose. The ran over the summer and invited responses from participants across the energy system to give their views on options for reform in the wholesale, capacity and ancillary services markets, with options to support flexibility services and bring forward huge quantities of low carbon power.

The Review is clear that whilst mass low-carbon power is a key aim, low carbon flexibility and maintaining operability are integral to the functioning of the system, and essential to get right in order to build the system of the future. This is a theme that is frequently missing from the power decarbonisation conversation, and too often an afterthought for policymakers. Whilst we have reservations around some of the proposed solutions, such as the potential implementation of a cap and floor mechanism for flexibility, we welcome the opportunity to input on crucial Government policy to achieve these aims.

Below is ENODA’s response in full to the review of Electricity Market Arrangements consultation. We have largely focussed on areas we believe need to be amended in order to take full advantage of new, effective technologies like Enoda’s Prime. For this reason, we have focussed on those sections which look at balancing and ancillary services markets and given no opinion on questions of investment in or acceleration of low-carbon generation. We are also interested in the next phase of the review programme, which looks to address the recent significant increase in balancing costs through exploring reform options for the Balancing Mechanism specifically.

[1] BEIS, Review of Electricity Market Arrangements. p.3

Question 1: Do you agree with the vision for the electricity system we have presented?

Enoda Ltd. agrees with the vision for the electricity system presented by the Government in the consultation document. We fully support the Government’s aim for fully decarbonised power by 2035. However, a system which can achieve this whilst continuing to deliver stability and cost-effectiveness for consumers, needs radical changes.

We agree with the Government’s assessment that the final third of the system left to decarbonise will be the most difficult yet[1], and that this cannot be achieved through renewables deployment alone. Enabling flexibility, ensuring system stability and optimising all assets on the system will be key challenges in decarbonising the remaining third. Therefore, we support the effort to reform the electricity markets to work towards an electricity system which can provide these benefits, as laid out in the REMA consultation vision.

Whilst in broad agreement with the vision, we would suggest that more space is given to the consideration for new and emerging technologies, those which can regulate voltage, power factor and frequency to provide grid stability and balancing, which could provide solutions to emerging challenges. Whilst specific support mechanisms for ‘first-of-a-kind’ technologies are out of scope for this review, consideration should be given to market design that is adaptable; that will be able to support technologies reaching wide-scale deployment stage within the next decade.

Question 2: Do you agree with our objectives for electricity market reform (decarbonisation, security of supply, and cost-effectiveness)?

ENODA agrees with the Government’s objectives for electricity market reform: decarbonisation, security of supply and cost effectiveness. Solving the energy trilemma where these aims can conflict with each other remains the key challenge of decarbonising the electricity system, and indeed across energy vectors.

Full decarbonisation of power by 2035 means a level of renewables penetration far above the percentage the current electricity grid is prepared for. As noted in the ‘Future Challenges’ section, stabilising the grid under high renewables penetration is becoming increasingly more expensive. This is the case in the UK and in other systems across the European Union and the United States. This risks the cost effectiveness of future renewable generation, but alternatively, not investing in these services jeopardises grid stability and therefore security of supply.

The primary aims of the project should be the three identified above. However, again, we would suggest that a secondary aim for the project could be a reform of the markets to allow for new and innovative technologies to launch at commercial scale in the UK and receive appropriate compensation. This will enable the achievement of the primary aim, as new technologies which can be employed to address the trilemma are commercialised. By designing markets which allow for the emergence of new technologies, the UK will retain its status as a ‘best in class’ electricity system, attract innovative solutions and companies to deploy in the UK, adding value to the economy and accelerating the achievement of the primary aims.

Question 3: Do you agree with the future challenges for the electricity system we have identified? Are there further challenges we should consider? Please provide evidence for additional challenges.

We fully agree with the challenges identified by the Government and acknowledge the interlinked nature of these challenges. If we are able to bring forward investment in generation capacity, at the pace required to meet a rise in demand from the electrification of other systems, we will require an expanded range of technologies, particularly, as identified, to provide low carbon flexibility and retain system operability.

Increased renewables penetration means serious challenges for supply and demand and maintaining system stability. Other electricity grids are currently struggling with this issue: several zones in the Netherlands distribution grid have reached maximum technical capacity[2]. In Poland, grid stability is predicted to collapse in 2026 at 50% renewables penetration, under current technical capability[3].

The challenges for a decarbonised electricity system largely stem from enabling low carbon replacements for all the functions fossil fuel power stations were able to provide to the grid: not only generation but balancing and operational services. Technologies like voltage and power factor regulation can be used to complement the profile of renewable generation: balancing the system when renewable output falls and providing essential services to ensure the stability of the electricity system. Market arrangements should be designed to allow for low carbon flexibility, balancing and ancillary service providers to come through, which would go much of the way to addressing the key challenges identified. These service providers must operate under market arrangements which allow them to generate revenue and remain profitable, in order to attract critical investment in low-carbon flexibility.

Question 4: Do you agree with our assessment of current market arrangements/that current market arrangements are not fit for purpose for delivering our 2035 objectives?

We agree that current market arrangements will not deliver a fully decarbonised electricity system, which also guarantees security of supply and cost effectiveness, by 2035. The issues that the Government has outlined with the current market arrangements achieving the stated aims are correct: current market arrangements do not support the deployment of low carbon flexibility or optimisation of assets, hinder competition, and do not send the right market signals for desirable features like demand reduction, sustained response and efficient location.

Markets need to be arranged to incentivise low carbon generation and stability services which allow for efficient use of the system. As discussed in our answer above, the challenge for the grid is replacing the totality of the bundle of services which were provided by fossil fuel generators: not only generation but balancing and operational services.

Market arrangements must be reviewed and, as the consultation document identifies, there is a need to think about long-term reform now, in order to implement a market design which supports achieving our ambitious decarbonisation targets.

This will include opening markets to new and innovative technologies, and ensuring markets are flexible enough to be able to provide revenue streams to these technologies. For example, the CLASS Project, run by ENWL, successfully demonstrated that capacity can be increased by controlling voltage on the electricity network. Using CLASS techniques could make maximum use of the existing electricity network and would not affect customers’ perception of their electricity service. Results from the trial show that if CLASS was rolled out across the whole of Great Britain the scale of the change in instantaneous electricity demand available would be greater than the output of a large coal-fired power station[4]. This flexibility in electricity demand has the potential to radically change the way we keep the entire electricity system in balance, minute-by-minute. With enough sites, voltage control technology can provide balancing services to National Grid, helping them to balance supply and demand for the whole of Great Britain.

However, at present, there is limited scope for voltage and power factor control technologies to participate in the balancing market or provide ancillary services such as frequency response or reactive power absorption. Whilst CLASS technologies are to operated by the DNOs under RIIO-ED1, and Ofgem have and signalled their intention to continue this treatment of CLASS in RIIO-ED2, we cleieve that allowing an open market for these technologies, and reducing uncertainty of review in every price control purchase,, would be beneficial.Market arrangements of the future must provide longer-lasting clarity on the markets available to new technology entrants and seek to enable deployment of those technologies on the open market which have significant positive contributions to make by facilitating a sound investment case.

Question 5: Are least cost, deliverability, investor confidence, whole-system flexibility and adaptability the right criteria against which to assess options?

Yes, we agree that these are useful criteria against which to assess the various options for reform. Market design should lead to solutions being delivered at the least cost, drive innovation and be open to all participants, including new players. There must be a design which rewards innovative technologies, as it is these which can be combined with low carbon generation for low-cost grid solutions to provide the full range of services to replace fossil fuel generators.

Changes to market design are to be achievable – not just theoretical. We understand the exclusion of ‘first of a kind technologies’ where no commercial case has been established, however, the markets should be designed to be open to rewarding emerging technologies which have a positive contribution to make to the grid, especially providing “stability-as-a-service”., Many of the technologies which will be instrumental in facilitating system decarbonisation may not yet be deployed across the network, but proven to have positive impacts on the grid, as in the CLASS project demonstration of voltage control technology.

As identified in the whole system flexibility paragraph, it is also extremely important to be able to include small and local players in order to achieve the main aims. Smaller players can contribute to flexibility and adaptability, reflecting the needs of the changing system. As the shape of the electricity system changes, distributed assets need to be recognised and rewarded and many perform well against the criteria identified in this question.

Question 7: What should we consider when constructing and assessing packages of options?

We agree with the Government’s decision to consult on various options for different aspects of the system, rather than full packages of reforms, at this stage. When constructing and assessing packages of reforms Government should consider how the different markets can work together to deliver services equivalent to the current role of large power stations. As mentioned in the consultation, reforms in some markets may have knock on impacts in other markets i.e. if the wholesale market sends sharp signals for flexible behaviour, there may be less need for support for investment in flexibility. There will also be technologies that can participate in multiple markets and provide stability-as-a-service to the system. Packaging of options should consider how companies working in these technologies may be best able to participate. Within the packaging options for wholesale, flexibility and operability there should be a provision for rewarding new technologies and technologies which are able to provide multiple grid services. Government should especially assess packages against coherence and comprehensiveness, to enable a joined-up markets solution that goes as far as possible in achieving the three core aims.

Question 8: Have we identified the key cross-cutting questions and issues which would arise when considering options for electricity market reform?

ENODA agrees with the consultation document’s assessment of key cross-cutting questions and issues arising from electricity market reform. We agree that the market is not likely to bring forward all the solutions which will be required for a fully decarbonised, secure and cost-effective system. However, the markets should be designed in such a way as to bring forward as many of these solutions as possible, including those not currently deployed at a commercial scale, to minimise Government intervention and encourage competitiveness.

We believe this will benefit development of solutions which address multiple problems, as they will be able to expand across multiple revenue streams, rather than technologies with limited functionality supported by Government mechanisms.

The decentralisation question is key to the system of the future: some decentralisation will reflect the reality of the future system. There is a role for the Electricity or Future System Operator but developing the role of Distribution Network Operators to Distribution System Operators, or introducing other institutions for distribution system operation, and empowering local decision makers to take a cross-vector view will be essential in balancing across the system, optimising network assets and ensuring the electricity system works with others to achieve decarbonisation.

Question 23: Are there any other changes to current wholesale market design and the Balancing Mechanism we should consider?

The possible reforms of the status quo identified under this option seem largely appropriate to consider in reforming the wholesale market and balancing mechanism. Reviewing the functioning of the Balancing Mechanism, we believe, is essential to delivering a least-cost, secure, decarbonised energy system. As discussed in our answer to Question Four above, there exist low carbon, low-cost technologies that can be deployed at commercial scale now which are not able to compete in a fully open Balancing Market Balancing Mechanism. Altering the Balancing Market to allow for technologies such as voltage and power factor regulation to be rewarded when deployed by a variety of parties enables low cost, low carbon balancing services to secure the stability of the grid. This would require a change to gate closure times, allowing these new flexible technologies to be much more responsive to real-time grid conditions.

There should be greater consideration of smaller providers who are able to provide more flexibility than the larger, traditional market participants; improving the balancing mechanism to take account of these participants will optimise the system by making the best use of the assets at all levels. A non-centralised model would best be able to promote this, although there are also arguments in favour of central dispatch models which we acknowledge, and many technologies would be deployable within either. We would be keen to work with the Government on the next phase of the REMA programme in exploring further options for reform of the balancing mechanism.

Question 35: Are we considering all the credible options for reform in the flexibility chapter?

We agree with Government that the current market framework does not maximise the potential for the full range of flexible technologies to deploy or operate flexibly. We also agree that it is imperative that operational signals for flexibility are correct in order to support renewables deployment.

The four options for reform identified seem credible, though we have serious concerns with a cap and floor mechanism and the supplier obligation scheme, although as noted these options would not be implemented in isolation. We also have concerns that the options for reform in the flexibility chapter would primarily reward existing flexible technologies and may disincentivise new technologies, such as voltage and power factor control services, from providing flexibility, however by reviewing the suggested options it may be possible to build this in further. We welcome the suggestion that policy options should be considered as enabling a pathway for new flexible technologies to transition into the market in the medium term, and encourage policy makers to continue to regard this as an important consideration.

Question 36: Can strong operational signals through reformed markets bring forward enough flexibility, or is additional support needed to de-risk investment to meet our 2035 commitment? Please consider if this differs between technology types

We once again agree with the opinion set out in the consultation document that a specific market wide mechanism for flexibility may not be needed with the right kind of signals from reformed markets. It is our opinion that those technologies which can provide a suite of services, which can be combined with renewable generation to fully replace fossil fuel generation, should be able to access revenue from across the markets to be commercially viable without a dedicated support mechanism. It is these which should be encouraged, and therefore a dedicated support mechanism may only serve to incentivise inefficient technologies with limited functionality.

Question 37: Do you agree that we should continue to consider a revenue cap and floor for flexible assets? How might your answer change under different wholesale market options?

Whilst a revenue cap and floor has been used successfully in other markets, we do not consider it a good option for flexibility. Given flexible assets are needed to balance supply and demand, to keep the system stable at critical times, we do not believe capping revenues for these services is desirable. Whilst costs for flexibility are likely to increase, this reflects the value of the services they offer to the grid, and a cap on revenues may prevent system operators from being able to procure these services at the time at which they are needed, especially if technologies are able to participate in other markets which may provide them with greater revenues. This is particularly pertinent where there are reforms to the Balancing Mechanism as suggested in the Wholesale Markets review chapter, though we would hope that all options for reform discussed in chapter five offer operational signals that negate the need for a cap and floor.

Question 38: How could a revenue cap and floor be designed to ensure value for money, for example a cap designed to ensure assets are incentivised to operate flexibly if they reach their cap?

As discussed in the previous answer, we are not convinced that a cap and floor mechanism can be designed in such a way as to ensure assets are incentivised to operate flexibility where they reach their cap. Though a cap and floor mechanism may incentivise smaller participants in the market – as with a guaranteed floor price the business case may be more compelling with de-risked investment, the consultation is right to note that such a mechanism has not historically been applied to such assets. It could be that a cap and floor mechanism is designed with smaller participants in mind e.g. Has an upper MW limit for single participants to provide, which would incentivise smaller participants and more easily facilitate competition between technologies of similar sizes. Larger participants, who can provide more of these essential services, could then be compensated for thee and the large positive contribution they offer the system.

Question 39: Can a revenue (cap and) floor be designed to ensure effective competition between flexible technologies, including small scale flexible assets?

As discussed above, the consultation is right to raise questions about the suitability of a cap and floor mechanism applied to both large and smaller scale assets. Were a cap and floor to be introduced, it may be useful to make this exclusively for small scale flexible technologies, as this enables them to attract investment and avoid some of the risks that can dissuade investors from distributed technologies. This would not apply to larger flexibility providers, incentivising them to provide large volumes of flexibility services when required at critical times.

Question 40: Do you agree we should continue to consider each of these options (an optimised Capacity Market, running flexibility-specific auctions, and introducing multipliers to the clearing price for particular flexible attributes) for reforming the Capacity Market?

In general, we agree with the three options for a reformed capacity market that incentivises flexibility. However, once again we wish to stress that it is essential that new technologies, in our case specifically voltage and power factor regulation, are considered under market arrangements in such a way as to support a robust investment case. The market must be more dynamic, we need new technologies to be incentivised to participate in the market by being appropriately compensated. Viewed through this lens, option two, with specific methods for procuring flexibility, could achieve this aim provided the criteria for low carbon technologies to participate in the market was considered with an eye on future technologies being able to participate. We would also be wary of the potential design flaws outlined in the consultation, especially the concern that a threshold may be set too low and therefore exclude new and innovative technologies.

Question 41: What characteristics of flexibility could be valued within a reformed Capacity Market with flexibility enhancements? How could these enhancements be designed to maximise the value of flexibility while avoiding unintended consequences?

Within a reformed Capacity Market featuring flexibility enhancements, we agree the named characteristics: response time, duration and location are useful characteristics. We would also suggest that the number of services technologies are able to provide to the grid should be priced into the auction, including operational and ancillary services, as this will build the business case to build more of these technologies into the system. Technologies which provide grid stability-as-a-service, which can replace multiple functions of the traditional fossil fuelled power station, not just one, should be incentivised by their benefit to the system being reflected by the markets they participate in.

Question 42: Do you agree that we should continue to consider a supplier obligation for flexibility?

We do not agree that a supplier obligation is an option that should continue to be considered – the issues identified in the consultation document are of too great a concern to us. Whilst we appreciate such a supplier obligation would only be used in combination with other options and may facilitate some aspects of competition, the financing and delivery risks are too high and outweigh the positives of this approach. Given these risks, we are not convinced it would be useful as an addition to the investment case, as suggested in the consultation document.

Question 43: Should suppliers have a responsibility to bring forward flexibility in the long term and how might the supplier landscape need to change, if at all?

Suppliers should not have a responsibility to bring forward flexibility; this should be achieved through market design in the wholesale, capacity and ancillary services markets rather than the retail markets. After the turbulent period last year in which many suppliers failed, the regulation of suppliers would have to become much stricter before further obligations could be placed on them with consumer confidence. Given the difficulties this would cause for suppliers and the regulator, we reiterate that there should not be a supplier flexibility obligation.

Question 61: Are we considering all the credible options for reform in the operability chapter?

ENODA agrees with the Government’s assessment of the options for reform of operability; though we suggest that continuing with the status quo is not desirable as it is likely to see a rapid increase in the cost of these services to the system operator and consumers.

We agree that it is not necessary to develop a dedicated support scheme for ancillary services. Of the options presented, we think it is especially important to consider the development of local ancillary services markets and giving a greater role to the DNOs, as this is where many new distributed technologies, such as ENODA’s Prime technology which corrects voltage, power factor, phase imbalance, and removes harmonics and noise through actively modulating the AC signal could be implemented to provide services for the grid as a whole. Using Distribution System Operation as a platform through which to provide vital balancing and ancillary services is an incredibly cost effect low carbon way of guaranteeing grid stability. There should also be a move towards considering new technologies to provide ancillary services, which may be better promoted under some options than others.

Question 62: Do you think that existing policies, including those set out in the ESO’s Markets Roadmap, are sufficient to ensure operability of the electricity system that meets our net zero commitments, as well as being cost effective and reliable? 

We do not believe that the existing measures set out are sufficient to ensure the operability of a low carbon, cost effective electricity system. Whilst we welcome the actions set out in the Smart Systems and Flexibility Plan and Markets Roadmap, they do not do enough to guarantee a system that can remain stable with higher renewables penetration. There is also a limited role for emerging technologies in these policy programmes.

We welcome the work by Ofgem and the Energy Networks Association to consider the role of DNOs in actively working to deliver our net zero commitments. As the CLASS deployment from ENWL showed, voltage regulation can have massive benefits for the system at a very limited cost, providing balancing services and stability-as-a-service. ENODA’s Prime technology goes a step further and can provide power factor and phase imbalance correction, and removes harmonics and noise through actively modulating the AC signal. By empowering the DNOs to act as a platform for local ancillary services markets, technologies such as voltage and power factor regulation can be deployed at low cost to provide low carbon stability. Regulators should however, view DNOs as a platform for these services, rather than sole providers. Existing policies, even those recently announced, do not allow for this or other innovative technologies to provide ancillary services.

Question 63: Do you support any of the measures outlined for enhancing existing policies? Please state your reasons. 

The possible measures outlined by Government in the consultation reflect some of our key points put forward in other answers and would be able to address some of the issues we have outlined. Giving the system operator the ability to prioritise zero or low carbon procurement could allow for more innovative technologies to be brought online, and de-risk investment in them by proving they are likely to attract a certain revenue through being prioritised. Secondly, a matrix approach reflects the point we have made throughout this response which is that participants in the markets who are able to provide more than one type of service should be rewarded. However, we recognise there is a role for specialised providers, and so would want to see this combined with other measures.

Question 64: To what extent do you think that existing and planned coordination activity between ESOs and DNOs ensure optimal operability?

We welcome the planned further coordination between the ESO and DNOs in the Markets Roadmap and the Open Networks project and believe that a future system where the ESO and DNOs work together in a more integrated way to maintain network operability will be key. We feel that empowering the DNOs to move towards future system operation, run local markets and function as a platform for local balancing and ancillary services provision is essential to building a system which achieves the three aims stated at the beginning of this consultation. (Though outside the scope of this review, we support the option, proposed in the April 2022 review of distribution system operation governance from Ofgem, of DNOs taking on DSO roles with internal separation. We believe this would make co-ordination between the ESO and DNOs most effective in delivering a reformed, efficient system).

Question 65. What is the scope, if any, for distribution level institutions to play a greater role in maintaining operability and facilitating markets than what is already planned, and how could this be taken forward

The primary way in which distribution level institutions are able to play a greater role in maintaining the operability and facilitating markets is by designing a market in which distribution assets can be rewarded for providing voltage and power factor regulation; key new technologies with a proven role to play in providing balancing and ancillary services to the grid.

ENODA’s Prime exchanger technology can be deployed on the distribution network in place of a bundle of power flow equipment, including the standard transformer, and provides functionality far beyond that of voltage regulation. By actively modulating the AC signal, Enoda Prime corrects voltage, power factor, phase imbalance, and removes harmonics and noise, enabling adjustment of the load of the grid, and providing balancing services.

This should be taken forward by implementing the suggested reforms in the April 2022 review of distribution system operation governance from Ofgem[6] under framework model one – internal separation of DSO roles within DNOs[7]. After implementation, beyond the three DSO functions already planned for assessment in RIIO ED2, this model would enable DNOs to develop effective distribution flexibility markets, mesh these with national markets through co-ordination with the ESO and evolve their operation of the network.

Question 67: Do you think it would be useful to modify the Capacity Market so that it requires or incentivises the provision of ancillary services? If so, how could this be achieved?

Yes, modifications of the capacity market could incentivise the provision of ancillary services. Currently, the participants in the capacity market who can also provide ancillary and flexible services are high-carbon emitters who benefit from the long-term certainty of capacity market contracts and are able to generate revenue from the ancillary markets. Therefore, were the capacity market to be reformed to prioritise low/no carbon participants who are also able to provide flexibility and stability services. This could be through adding multipliers for low carbon flexibility or paying out for carbon avoided in the ancillary services market if capacity market participants also enter this market. This will, unfortunately, increase the complexity of the market and will require significant resources to get right, however it would incentivise the technologies which are able to address multiple challenges and achieve the multiple aims of this review.

Question 70: Do you agree that we should continue to consider a payment on carbon avoided subsidy for flexibility?

We agree that a payment for carbon avoided, as a subsidy for flexibility, would be a good option to continue to consider. Most low carbon sources of flexibility have yet to reach price parity with their high carbon alternatives, so this option would allow low carbon flexibility providers to offer their services at a competitive price. It is also useful to have a common currency for the value for money for low carbon projects, as noted in the consultation document, as it allows for technologies to compete with a common standard. We acknowledge though, that this can provide different incentives to different technologies, and standardising across these may prove challenging, as recognised by the Dutch government earlier this year[8].

[1] BEIS, Review of Electricity Market Arrangements. p.13

[2] Enexis Groep, Interim Report 2021. P.4

[3] Enoda Internal Analysis

[4] ENWL, CLASS Summary Factsheet. 2017. https://www.enwl.co.uk/globalassets/innovation/class/class-documents/class-summary-factsheet.pdf

[5] Baringa, Assessing the impact of CLASS on the GB Electricity Market.

[6] Ofgem. Call for Input: Future of local energy institutions and governance.

[7] Ofgem. Call for Input: Future of local energy institutions and governance. p.34.

[8] Lexology. Summer update SDE++ subsidy scheme: 2022 and beyond.