The proposal in REMA (Review of Electricity Market Arrangements) for zonal pricing within the GB power market has divided opinion across the energy sector. The idea of zonal pricing is to encourage generation to be built where the demand are highest by pricing it higher there. In effect to stop more generation be built in North Scotland which has a low population and is already oversupplied and more in the South ion England (although I’m not sure how many wind or solar farms can be located in central London).
The chief argument against this is the uncertainty a major change in market pricing would cause at a time of high investment. The Government decision was announced this morning, “We have decided to retain a single national GB-wide wholesale market and introduce an ambitious package of reform to improve the efficiency of our future power system.” Here we present reactions to the news.
Chris Matson, Partner at LCP Delta, comments:“While an earlier commitment would have been preferable, today’s announcement significantly reduces investment risk and increases the likelihood of achieving the Clean Power 2030 ambition. Delivering CP2030 will require an unprecedented expansion of renewables and low carbon technologies. By maintaining a national pricing system, investors now have the clearer and more predictable price signals they need to accelerate this investment.
“Whilst proponents of zonal pricing pointed to the opportunity for lower energy costs in high renewable areas, our latest analysis shows that if the government had introduced zonal pricing, wholesale prices could have increased for 98% of demand in GB – with only the north of Scotland seeing a reduction.
“Constraint costs – which zonal pricing aimed to reduce – will continue to be a significant issue under the national pricing system. Our analysis shows that, even accounting for announced network upgrades, constraint costs could double from last year’s levels to reach £3.2bn per year by 2035. Further investment in network upgrades, demand-side flexibility, and storage will be crucial to bringing down these costs.”
Joshua Sherrard-Bewhay, ESG analyst, Hargreaves Lansdown: “Over the past few decades, electricity bills in the UK have gone from the 2nd lowest in the EU to 19% above the current EU average. But it is the suggestion zonal will cause business uncertainty, at a time when the UK are in a period of deep investment, that seems to have swung it.This has caused a split between legacy energy companies, like Centrica, and technology-driven providers like Octopus Energy. Those companies that are more agile and tech-focussed are best placed adapt to these sorts of proposals.”
Sam Richards, CEO of pro-growth campaign group Britain Remade, said: “The government had a clear opportunity to cut energy bills, unlock clean power, and fix a broken system, but they’ve given in to the fearmongering of the big energy companies and ducked it. By refusing to back local pricing, ministers are choosing to keep households paying more than they should.
“The current system, designed in the 1930s, does not make economic sense in the 21st century – it discourages investment, wastes money, and keeps bills artificially high. Local pricing would have delivered lower prices right across the country, not just in areas that are home to wind and solar by making the grid run more efficiently.
“This year one wind farm in Scotland has wasted more energy by being switched off than it has generated. The government’s short-sighted mistake will make this worse and leave Britain with higher bills for years to come.”
Kate Mulvany, Principal Consultant at Cornwall Insight: “The government’s decision to rule out zonal pricing brings a long-awaited moment of clarity after years of policy uncertainty, but clarity is not the same as resolution. This move will not solve the deep-rooted issues in Great Britain’s electricity market, and it must not be used as an excuse to continue business as usual.
“If the government is to pursue a reformed national pricing model, it must be careful not to just tinker around the edges. It must be bold and comprehensive, designed to swiftly deliver efficient price signals and support investment in low-carbon technologies. No easy task when you consider reformed national pricing has yet to face the level of scrutiny or modelling applied to zonal pricing.
“Presently, consumers face the worst of both worlds: paying wholesale prices that are still driven by volatile gas markets, and premium costs to replace gas in the power system with renewables. We cannot assume they will be willing to pay like this forever.
“The government has made its choice on zonal pricing. Now, it must lead with purpose and pursue comprehensive reform with the urgency and seriousness this critical moment demands.”
RenewableUK’s Executive Director of Policy Ana Musat said: “This decision is good news for billpayers, in part because the prices set in the Government’s auctions for clean power contracts will be lower than they would have been under the costly zonal pricing regime.
“It will give confidence to private investors that the UK is one of the best markets in the world to build new renewable energy projects, by ending the uncertainty that zonal pricing would have caused.
“We’re pleased to see Ministers are going to continue to work with us to reform our electricity market by enabling more grid capacity and energy storage to be built to reduce constraints and add greater flexibility to the system.”
Caroline Bragg, CEO of ADE: Demand, said: “The Government needs to get a handle on the cost of living. But, by rejecting zonal reforms that align us with our peers, today’s decision risks higher costs. Piecemeal tweaks won’t deliver the lower bills for all that Ofgem itself says is possible. With grid costs potentially hitting £8bn by 2030, how does the status quo stop consumers footing the bill?
“The current wholesale electricity system has faced criticism for creating market inefficiencies, as it often fails to reflect the true cost of delivering electricity to different regions across the country. DESNZ’s own research suggests zonal pricing could save £24 billion in grid upgrade costs and Australia, Sweden, Norway and Denmark are already using the zonal pricing method for their respective electricity markets.”
Giles Hanglin, CEO of Apatura, the renewable energy developer, said, “With curtailment costs soaring and industries under pressure, the likely decision to shelve zonal pricing is disappointing, but it isn’t the end of the road.
“One of the strongest arguments in favour of location-based pricing was its potential to encourage energy-intensive industries to move to areas like Scotland, where renewable energy supply far exceeds demand. Doing so would reduce the need for curtailment – paying the renewable energy companies to power down”.
“A new generation of AI-ready data centres located in Scotland can make full use of our constrained renewable energy, clean power that would otherwise go to waste. This would ease grid congestion, reduce curtailment payments for billpayers, and support the UK’s ambition to lead in AI, green data, quantum, and advanced compute.”
Trevor Hutchings, CEO of the Renewable Energy Association said:”To get to an energy system that is fit for the future, we can’t rely on the policies of the past. Market reform is essential, but we know from our own membership that there are strong views on either side of the debate, and that any change can create winners and losers.
“However, it is uncertainty that dents investor confidence and I am pleased we now have further clarity. Focus now must be on growing our clean power system and, critically, bringing down the cost of electricity so that consumers feel the benefits of net zero in their pockets.
Keith Anderson, Chief Executive of ScottishPower said: “This is the right decision from Government as it lifts a big cloud of uncertainty over investment in the energy system. Now we will crack on with investment in the grid to deliver the goals of Clean Power 2030 – supporting economic growth and energy resilience and removing up to £5 billion of annual constraint payments by making the energy system more efficient.”
