The UK government’s decision to maintain a national electricity pricing model and rule out zonal pricing has been welcomed as a major step towards market certainty by Montel Analytics, following the publication of the summer update to the Review of Electricity Market Arrangements (REMA).
Reacting to the announcement, Phil Hewitt, Director at Montel Analytics, said, “The market has been asking for clarity for some time and the imminent arrival of the 7th Auction Round for renewables has been the catalyst that has finally closed the high-level debate over whether to have zonal or national wholesale pricing. This is a good thing after three long years.
“Locational pricing still comes through changes to transmission charging so the market will want clarity on that and soon.
“There are still many detailed questions to be answered, as the government’s announcement today makes clear, so there will be more debates. These will be important for consumer costs but unlikely to play out on front pages. REMA is not finished, but the major battle is over.”
Hewitt said the update brings a welcome sense of certainty to an industry preparing to invest billions in generation, flexibility and infrastructure.
“The theme of the update seems to be clarity and reducing uncertainty. Regardless of which side of the argument you’re on, everyone is pro-decision,” he said.
“One of the main reasons zonal pricing has been discounted is because the government is asking parties to invest more than ever in the energy system. People need to know the rules of the game the government is asking them to play.”
He warned that the complexity of modelling investment decisions under a zonal system would have introduced significant risk, ultimately eroding its potential value.
“There would be inherent risk in implementing zonal pricing, as modelling a market that does not yet exist is very difficult. That risk would be priced into assets’ activity. The government has decided that the mitigations to that risk would ultimately undermine the benefit of zonal pricing.”
However, he cautioned that the debate is far from over.
“There are still outstanding uncertainties, including reforms to transmission charges (TNUoS) and how the balancing mechanism will evolve. But the shift from today’s system to a reformed national pricing model is smaller and more manageable than a switch to zonal. That reduced uncertainty seems to have been the deciding factor.”
A major market decision
In its REMA summer update, the Department for Energy Security and Net Zero (DESNZ) confirmed that the UK will retain a single national wholesale price for electricity. The government said the move would support a fair, affordable, secure, and efficient energy system – ending years of speculation around the potential move to zonal pricing.
The decision is expected to be broadly welcomed by investors, developers and consumer groups who had expressed concerns about regional disparities and uncertainty under a zonal system. However, some advocates of zonal pricing, including the National Energy System Operator (NESO) and Ofgem, had argued that it would reduce system balancing costs and reflect physical constraints more accurately.
While the decision ensures near-term policy stability, experts have noted that deeper reform is still needed to address long-term grid congestion and investment alignment.
