Clean Power 2030: REMA Update - protections for CfD projects

In an update webinar on the Review of Electricity Market Arrangements (REMA) on 23 April 2025, the Department for Energy Security & Net Zero (DESNZ) provided further insights into the protections that could apply to projects successful in obtaining a Contract for Difference (CfD) in allocation round 7 (AR7) if zonal pricing were to be adopted through REMA (rather than the alternative reformed national pricing proposal). For more information on the proposed REMA reforms, see our article here.

It is proposed that CfD AR7 projects, as well as existing CfD projects, would be safeguarded against both zonal price risk and locational volume risk:

• Zonal price risk: the price risk uncertainty associated with a move to zonal pricing would be mitigated during the CfD contract period through introducing a zonal CfD reference price. It was clarified that if the term of CfD contracts is extended beyond 15 years (DESNZ is currently considering AR7 reforms following a consultation which closed on 21 March), zonal price risk protection would automatically be extended, reducing the "merchant tail" during which the project would be exposed to zonal price risk.
• Locational volume risk: the aim would be to ensure that AR7 bidders face no additional locational volume risk compared to a national pricing counterfactual scenario. It was noted that this would likely be achieved through a bespoke Financial Protection Scheme (FPS), underpinned by primary legislation. A key component of the FPS would be the methodology for calculating the differential volumes due to the shift to zonal pricing. It was noted that DESNZ wants to develop a methodology in partnership with industry, based on one of three models:
  • Historical Balancing Mechanism Turn-Down Volume - based on historical volumes during the final years of a national system (it being assumed that zonal pricing would take effect from 2032 and therefore volumes during the years 2027-31 would be utilised as "historic" volumes in this method). This ex-ante approach would provide revenue certainty but would not be reflective of later volume changes.
  • National Zonal Merit Order Comparison - based on comparing the merit order of a constrained zonal market with that of an unconstrained zonal market (as a proxy for a national counterfactual market). This ex-post approach would provide less certainty up front but may be more reflective of volumes in need of protection.
  • Balancing Mechanism Turn-Down Forecasting - using forecasts of turned-down volumes in a national market as a basis for volumes which should be eligible for protection, with a subsequent ability to update forecasts based on new data.

Next steps

The proposals discussed in DESNZ's webinar are expressed not to be government policy. DESNZ welcomes feedback: (a) from potential AR7 bidders on whether this package of measures provides sufficient certainty to make a bid if zonal pricing were adopted; and (b) on the possible methodologies for the FPS to finalise their approach should zonal pricing be adopted. DESNZ is also considering extending protections to non-CfD projects.

Ofgem are considering in more detail the potential role of TNUoS within a zonal market, where some locational signals would already be provided through the zonal pricing. Post-REMA decision, Ofgem plans to look into the role of network charges in a strategically planned world, including interactions with the grid connection reforms (see our article here).

DESNZ aims to conclude the policy development phase of the REMA programme by mid-2025, with the final REMA decisions to be announced before the opening of the AR7 auction later this year.