POST-TRANSITION ELECTRICITY MARKET STRUCTURES

1. Introduction

Post-transition electricity market structures describe the institutional and regulatory arrangements that may emerge after the electricity sector moves from a predominantly fossil-fuel-based system toward a low-carbon, highly electrified and increasingly decentralised electricity economy. In the United Kingdom, this does not necessarily mean abandoning competitive markets. Instead, the emerging structure combines wholesale trading, long-term low-carbon contracts, capacity mechanisms, flexibility markets, network regulation, storage and system planning.

The Government's Review of Electricity Market Arrangements (REMA) was established specifically to consider reforms capable of supporting a decarbonised, secure and cost-effective electricity system. Its later work has examined stronger locational and operational signals and the future role of the Contracts for Difference and Capacity Market mechanisms.

2. From Energy-Only Markets to Multi-Layered Markets

Traditional electricity markets primarily remunerate energy generated and consumed. A post-transition structure increasingly recognises several distinct values:

energy supplied to consumers;

capacity available during system stress;

flexibility capable of responding rapidly to changing conditions;

balancing and ancillary services;

network capacity in constrained locations; and

long-term investment certainty for low-carbon generation.

The result is a multi-layered electricity market architecture rather than a purely energy-only market.

3. Contracts for Difference

The Contracts for Difference (CfD) mechanism provides long-term revenue stabilisation for eligible low-carbon generators. A generator receives or pays the difference between a contractual strike price and a reference price, reducing exposure to wholesale-price volatility. The Government describes CfDs as a principal mechanism for supporting new low-carbon electricity generation.

The post-transition market can therefore combine short-term competitive electricity prices with long-term investment contracts. This structure attempts to reconcile market competition with the substantial capital requirements of renewable and other low-carbon infrastructure.

4. Capacity and Flexibility Markets

A low-carbon system requires adequate resources when renewable output is low. The Capacity Market provides payments for reliable capacity capable of contributing during system stress. The current framework includes generation, storage and demand-side resources subject to eligibility requirements. The 2025 Government update reported that capacity auctions had secured substantial capacity for future delivery years.

Future structures may increasingly value demand response, batteries, aggregators and flexible consumption, allowing consumers themselves to become active market participants.

5. Locational Electricity Markets

A major post-transition question concerns where electricity is produced and consumed. Large offshore-wind resources may be located far from major demand centres, while transmission constraints can cause congestion.

REMA has therefore considered stronger locational signals alongside operational reforms.

Legally, such reform raises questions concerning network charging, property and investment rights, market access, consumer protection and the treatment of existing contractual arrangements.

6. Regulatory and Institutional Structure

The post-transition system requires coordination among DESNZ, Ofgem, NESO, electricity network operators, market participants and government-backed delivery institutions.

Ofgem remains responsible for economic regulation and enforcement, while system planning and operation increasingly involve an integrated system-operator model. This creates a governance structure in which markets operate within strategic system-planning parameters rather than functioning as an entirely independent mechanism.

7. Case Law

Case 1: Tempus Energy Ltd v European Commission (Case T-793/14, 2018)

Facts: Tempus, a demand-side response provider, challenged EU State-aid approval of the UK's Capacity Market.

Legal Issue: Whether the European Commission could approve the scheme without opening a formal investigation despite potential concerns about its compatibility with State-aid rules.

Judgment: The General Court annulled the Commission's decision because the Commission had not properly investigated the existence of difficulties surrounding the measure.

Legal Principle/Ratio Decidendi: Complex electricity-market interventions require sufficiently careful regulatory assessment where relevant doubts exist.

Significance: The case demonstrates that post-transition market design must properly account for new technologies and alternative resources, including demand-side response.

Case 2: Commission v Tempus Energy (Case C-57/19 P, 2021)

Facts: The Commission appealed the General Court's judgment concerning the UK Capacity Market.

Legal Issue: Whether the Commission had lawfully assessed the State-aid measure.

Judgment: The Court of Justice set aside the General Court's judgment and dismissed Tempus's original action.

Legal Principle/Ratio Decidendi: Judicial review of complex economic assessments must respect the applicable legal standard while requiring the competent institution to examine relevant circumstances properly.

Significance: The litigation demonstrates the legal complexity of designing capacity mechanisms during electricity-system transformation.

8. Consumer Protection and Competition

Post-transition structures must continue protecting consumers from market power, excessive charges, discriminatory access and poorly designed incentives. Long-term contracts can provide investment certainty but may also affect how wholesale prices transmit information to generators and consumers.

Consequently, the legal framework must maintain an appropriate relationship between competition, regulation and public-interest objectives.

9. Conclusion

The post-transition UK electricity market is likely to be characterised by hybrid and multi-layered regulation rather than a single market mechanism. Wholesale markets can coexist with CfDs, capacity mechanisms, flexibility services, storage and increasingly sophisticated network planning. The central legal challenge is to ensure that these mechanisms remain competitive, technologically neutral where appropriate, transparent, secure and compatible with consumer interests and decarbonisation objectives. Post-transition electricity law is therefore best understood as a framework integrating market competition with long-term system coordination and low-carbon investment governance.