Meeting the Net Zero target for the entire economy by 2050 will necessitate doubling electricity generation, primarily from decarbonised sources. The advancements in cost reduction, particularly in renewables like offshore wind, indicate their pivotal role in the future UK electricity landscape.
Renewables differ significantly from traditional coal and gas plants in terms of characteristics. Unlike the on-demand capability of fossil fuel plants with operating costs dominated by fuel expenses, renewables incur substantial upfront construction costs but minimal ongoing operating expenses due to harnessing wind and solar energy freely. As renewables generate intermittently based on weather conditions, future electricity markets must incentivise new technologies supporting the grid during non-generating periods. This involves low-carbon alternatives like gas with carbon capture, hydrogen-fueled turbines, storage solutions (e.g., converting excess electricity to hydrogen), and demand-smoothing measures (e.g., smart electric vehicle charging).
To achieve the Government's 2035 goal of fully decarbonizing electricity generation, market structures must facilitate large-scale renewables investment, reward flexible technologies, and consider a holistic system approach. The Committee's advice on the Sixth Carbon Budget acknowledges this and calls for a strategy to enact necessary reforms. The government's Review of Electricity Market Arrangements (REMA) aims to address these concerns.
An independently chaired Expert Group, established by the Committee, concluded that current policies alone are insufficient for full decarbonization. The predominant challenge in the 2020s is securing substantial investment in low-carbon generation, storage, and networks. In the 2030s, challenges shift to efficiently operating the low-carbon electricity system, especially with the dynamic demand from widespread electric vehicles and heat pumps.
The Group prioritised avoiding an investment hiatus due to the rapid and extensive investment required in the coming decade. Hence, they advocate an evolutionary approach in the short term (2020s), with more fundamental reforms considered for the 2030s. The Group suggests evolving current Contracts for Difference, incorporating more location-based pricing, and adjusting the Capacity Market to address challenges and ensure investor confidence stability.
However, certain challenges remain unaddressed, such as energy mismatches. For instance, while hydrogen production can absorb excess renewable generation during high wind speeds, there's a need for clarity in aligning incentives within the wholesale market. A framework is also required to engage consumers and leverage the flexibility of local assets, like smart electric vehicle charging. Further work is needed to develop options addressing these challenges.