Net Zero Watch: Reeves is recycling a failed electricity pricing wheeze

Campaign group Net Zero Watch has dismissed Rachel Reeves’ latest promise to cut the link between gas and electricity prices in the UK, saying that it has already been examined and found wanting by NESO’s official electricity market review in May 2024. Speaking in Washington, Reeves said that she and Energy Secretary Ed Miliband are “working to come up with a practical way that we can de-link those prices”. 

Andrew Montford, Director of Net Zero Watch, said: 

“The grid has already looked at the main ways of trying to decouple electricity prices from gas and concluded it is a non-starter, saying it wouldn’t deliver benefits to consumers and that it was not deliverable in practice. The EU has reached the same conclusions. It is therefore no surprise to see Reeves and Miliband pursuing it anyway.”

Notes for editors

In commodities markets, the market clears at the price paid to the participant with the highest marginal cost, because participants with low costs do not accept that they should have a lower price than high cost participants, because everyone is selling the same thing. 

In the UK wholesale electricity markets, participants are encouraged to bid their true costs through a “pay as clear” mechanism. However, this only makes marginal difference to the alternative “pay as bid” mechanism, which simply leads participants to guess the costs of other participants and to bid what they think the market clearing price will be.

The grid’s Review of Electricity Market Arrangements (REMA; 2022–2025) looked at various ways to end the link:

• Splitting the market into separate pools

• Moving to pay-as-bid

• A single buyer model or regulated asset base for gas plants.

The report concluded:

“Following extensive work to develop and assess the [Green Power Pool] and Split Market options we will no longer continue to consider them in REMA. This is on the basis that they would not deliver benefits for consumers and fail in our assessment against our REMA criteria of deliverability and investor confidence.”
https://assets.publishing.service.gov.uk/media/65ef6694133c220011cd37cd/review-electricity-market-arrangements-second-consultation-document.pdf

The EU has also looked at such changes and reached identical conclusions to the UK. https://www.linkedin.com/posts/lionhirth_uvdl-activity-7439657808645668864-XNtk?utm_source=share&utm_medium=member_desktop&rcm=ACoAADcQw-kBELm9FWRv4IGIOG8gJyFBnk9CRyc