Simulating thenew British electricity-market reform

Abstract

The British government is implementing fully its novel Electricity Market Reform (GB EMR). Its objective, in line with European directives, aims at replacing existing nuclear and coal plant with low-carbon systems, to deliver reliable and affordable power. Though the GB EMR has proposed several policy instruments for meeting its objectives, and the academic literature has discussed the main issues, no known report includes a comprehensive and dynamic simulation exercise that assesses the extent of this profound and important initiative. This paper presents a system dynamics model that supports analysis of long-term effects of the various policy instruments that have been proposed in the GB EMR, focusing on environmental quality, security of supply and economic sustainability. Using lessons learned from simulation, the paper concludes that effectively achieving the GB EMR objectives requires this comprehensive intervention or a similar one that includes the promotion of low carbon electricity generation through the simultaneous implementation of various direct and indirect incentives, such as a carbon price floor, a Feed in Tariff (FIT) and a capacity mechanism.