Growing old ungracefully? Nigel Cornwall introduces his series on the 30-year-old GB electricity market

0
730

THE GB Electricity Market celebrated its 30th birthday earlier this month and ICON marked the occasion with a feature that shared a brief timeline of electricity trading.

As part of the article, we introduced four weekly features where Nigel Cornwall will be reflecting on the lessons of the past and what these could mean for the trading arrangements going forward.

Nigel Cornwall is a well-known energy industry commentator and founder of Cornwall Insight.

His latest venture is New Anglia Energy, which is a company formed to support local energy markets in Norfolk and Suffolk.

Its purpose is to demonstrate learning by doing, using the knowledge and relationships developed by Nigel in a long and fruitful career in the energy sector to support local stakeholders and initiatives.

The first part of the series will be published later this week.

 

In this feature, Nigel will introduce his series to us:

“Usually when a 30th birthday or anniversary comes along, there are noisy celebrations but this month’s milestone for the GB electricity trading arrangements went by largely unnoticed.

Should this be taken as tacit recognition that the arrangements as they have evolved over this period are well-functioning?

And do they make up a sound basis to help meet new and increasingly powerful challenges going forward and deliver the 2050 net zero target?

The answer to both parts of this question is unfortunately a resounding ‘no’.

I will address both questions in a series of linked weekly pieces that will appear in four instalments.

My conclusion is that the electricity industry has arrived at a watershed, where significant change is once more needed but inevitable.

If it cannot provide it, radical change is likely to emerge from above.

 

A new start followed by an abrupt stop

The first piece, which will be published later this week, looks at the electricity Pool of England and Wales.

This was a centralised, mandatory one-sided auction touted by its designers back in 1990 when it was launched as “best in class”.

The Pool set a half hourly price, with the parties managing the associated risks and delivering price certainty through a dense web of financial contracts around it.

It was governed by a multi-party contract, the Pooling and Settlement Agreement, which required very high levels of support from both sides of the market to change it.

But, as the market split on almost tribal lines between generators and suppliers in those days, meaningful change did not happen.

As you will see, the Pool quickly came into disrepute, and the governance of the arrangements was almost static.

As a final hurrah, the Pool did manage largely successfully to deliver full retail deregulation in 1998-99 albeit based on extensive use of profiles.

But within less than a decade of start-up, the Pool was deemed by the regulator to be flawed beyond repair, and it was replaced by something very different.

 

A new decade and two fresh starts

The second piece will look at the basic template for the new electricity trading arrangements (or NETA model), which replaced the Pool in 2001, and the establishment of Elexon to act as a manager of the centralised processes.

This was fundamentally – and intentionally – chalk to the Pool’s cheese.

This was a decentralised trading arrangement – a net, not a gross, trading mechanism, in which buyers and sellers could trade imbalances against physical (or delivery) contracts.

In reality, though, this concept of a voluntary trading arrangement has proven illusory as electricity flows never match (other than by accident) and costs of balancing and other non-discretionary services to maintain the power system need to be recovered across all parties whether they trade bilaterally or not.

And the bottom line is that NETA simply swapped out one type of complexity for another at the wholesale level and rolled forward the complexity of the retail arrangements that had been bolted on in 1998 to embrace the domestic retail market.

An important staging point during this second phase was the extension of the NETA market in 2005 into Scotland, giving us the awfully termed “BETTA” market – the British Electricity Trading and Transmission Arrangements.

The inclusion of transmission into the solution was very important as different arrangements for network charging applied north of the border until that point.

This change to transmission arrangements as much as the energy trading solution has had a far-reaching effect in Scotland since.

The governance of NETA – or BETTA as we must now call it – was and remains also strikingly different to that of the Pool.

It operates under a code, overseen by a regulator who assesses changes against high-level objectives that are hard-wired into the code and reflect economic regulatory, and not contractual, objectives.

If the regulator believes a change can be justified by reference to these “applicable” objectives, then change will follow.

 

Into a third decade but missed turnings

The third piece will look at the BETTA market as it has evolved since the early days.

There have been over 400 rule changes introduced to the rule book, the Balancing and Settlement Code.

While some of these modifications look very significant, the reality is rather different, and I will explain why in most substantive respects the fundamental elements of the new market have similarly failed to adapt during a period of sustained wider change to the electricity system.

These changes centre on shifts to the timing of “gate closure” (the point at which the market closes and parties submit bids and offers to adjust their positions), multiple, sequential changes to the imbalance pricing rules, with notably a shift from two prices to one, and important but far from transformative modifications to the treatment of different costs (“tagged and flagged”).

There have also been important changes to methodologies for costing transmission losses and other charge components, but while incentives are unquestionably sharper the underling nature of the market remains unchanged.

Latterly there have also been important changes to enable half hourly settlement and the start of a removal of the use of profiles, but at the point of writing these remain at the development stage for virtually all domestic users.

As a consequence, the industry and its regulator are prevaricating over delivery of changes that could at long last justify the profound effort and resources that have been deployed over a decade at the introduction of smart meters.

In parallel the governance arrangements have also been flexed with much fanfare on a number of occasions by the regulator.

Whether these changes amount to much more than a row of beans is a moot point, as the essential mechanics of NETA remain the same today as they were in 2001.

The regulators insistence on flexible governance looks a bit like a smoke and mirrors trick in a world where simple changes can take two years or more to bring forward, assess and determine, and in which there is a high embedded cost of change owing to the depth and complexity of the underlying settlement processes.

The fact that in 2020 there is no environmental and carbon-based parameter to help assess change could be seen as reflecting how far the trading arrangements have become removed from normal policy formulation.

 

Another decade, a much harder journey

The fourth and final piece is a more personal piece.

It will consider the implications of where we sit today, with meaningful change frequently being kicked into the long grass or filibustered.

Major reform programmes have been a feature of the past decade but notably the past five years, but they have flattered to deceive.

Indeed, the electricity market architecture today is not noticeably different from that in place in 2010.

Change is constantly on the horizon, but it always seems to be moving further out.

I have been arguing unsuccessfully for several years that major system change is required.

But the ante has been upped considerably recently by the adoption of the 2050 net zero target (2045 in Scotland) last year.

Nearly a year on since adoption of the target, it is remarkable that the governance of the market rules ticks along almost in a vacuum.

We maintain the presumption around an efficient national market, when it is clear that local dynamics are becoming increasingly important and real markets that deliver services to consumers are becoming more decentralised and localised.

In this context Extinction Rebellion is not a marginal pressure group but an increasingly broad coalition of citizens who fear the gap between where we are today and where we need to get to is too big, and that much faster action is required.

It is hard to disagree with them.

 

Why we need to learn quickly

Overhanging all of these four pieces are some simple propositions around the importance of transparency, accountability, responsiveness and good governance if the trading arrangements are to quickly adapt to the new challenges.

But we also now need to see real change in a way the system has not seen before, and the current incremental approach needs reinvigorating if we are to avoid an early crisis.

We need to work from the top down.

There is a pressing need for more explicit, stable and focused regulation if we are to re-establish a healthy balance and interaction at a time when rapidly increasing demands will be made of the electricity system as we electrify heat and transport, and that balance will need to explicitly address the needs of the many millions that are not able to engage or chose not to engage with their suppliers.

Fuel poverty and vulnerability are fast rising up in the agenda too.

Never has the mantra that the market needs to function in the interests of all consumers been more relevant.

Regulation needs to refocus in on what it is there to achieve, and there has to be a much clearer understanding of the framework in which the government expects it to operate and the interaction between choice and consumer protection.

And this framework all needs formalising, so it is clear and unambiguous.

At the same time technology disruption will present real challenges from the bottom up, and it will require a new balance to be struck if all system users are to enjoy the benefits that change should bring.

I personally believe in five years the idea of the meter as the gateway to the customer will have gone and we will have unbundled services much closer to the telecoms model with new protocols for measuring consumption behind the meter.

If we have not achieved that, it will simply be because of incumbency issues and governance inertia.

We are also likely to see a resurgence in decentralised energy provision and the concept of energy as a service provided by multiple providers.

Deployment of batteries and EVs – which by 2025 will be mainstream – will greatly accelerate these changes.

And as Britain leaves the European Union, we have the ability to think afresh about these issues.

That said, what is clear is that there is emerging a much greater diversity around European thinking and an appetite to learn and change than I would observe is presently at play in Britain.

Once the politicians refocus on the sector, I expect some very difficult questions will be posed of it.

Thirty years on, as these new pressures and drivers for change become irresistible, the main finding of my 30-year lookback in my opinion at least is that we have largely failed to learn the lessons of the past.

While this has created a situation in which there have been real winners and losers, this is merely been an extended dress rehearsal for the next phase of probably radical market change.

We are now entering a potentially unstable fourth decade in which fundamental change must occur.

A postscript on the current pandemic.

These already huge challenges have not become any easier with COVID-19, which will cause significant commercial distress in the marketplace as well as in the wider economy to add to the pressures already building around effecting a faster and more drastic shift to low-carbon outcomes and net zero.

It is possible that this could distract from tackling the issue of market regeneration, whereas what it should do is show the extent to which we are already behind the game.

But the irresistible pressure for change will return, and weather patterns will still be more extreme, and behaviours will change.

Whether this change comes from within or is once more externally imposed – as happened at the end of the 1990s – remains to be seen.

At the very least I am hoping these themed pieces that will follow will stimulate debate.”