The government’s decision to rule out a zonal electricity pricing system brings to a close a period of intense energy sector debate.
Phil Hewitt, director of Montel Analytics, an energy market analysis firm, commented that “regardless of which side of the argument you’re on, everyone is pro-decision”.
When the current government came to power a little over a year ago, a key part of its energy strategy included wrapping up the Review of Electricity Market Arrangements (REMA), the most recent phase of which began in 2022 and saw a ‘vicious policy fight’ play out.
Now, less than five years before the 2030 target for a clean power system and with the next Contracts for Difference round (AR7) critical for delivering the needed renewable energy capacity, the government had little choice but to commit.
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, ruling out a system within which price signals would be locational.
According to the government, this will support an “affordable, secure, and efficient energy system”.
It said that it will now deliver a Reformed National Pricing Delivery Plan, leaning heavily on reforming Transmission Network Use of System (TNUoS) charges, the Strategic Spatial Energy Plan (SSEP) commissioned from the National Energy System Operator (NESO) and battery energy storage. This will come off the back of a new round of consultations that will be held before any further, more specific information on how market reform might look is published
According to Shraiya Thapa, clean energy knowledge lead at law firm Freeths, the delivery plan must be one that “commits to policy proposals now and not in three years’ time”.
Thapa added: “The upcoming delivery plan will need to take the best of REMA’s proposals and possibly new ones to formulate a credible design that both incentivises clean energy investment and has a tangible impact on consumers’ bills by 2030.”
Widespread relief that zonal pricing was rejected
Zonal pricing would have seen the UK divided into smaller sections within which the price of electricity would be set based on factors including generation capacity, transmission capacity and demand.
Electricity networks and most major energy suppliers came out against this option, although a vested interest in maintaining a version of the current system that pays a premium to certain stakeholders could have been an influencing factor.
Much of the praise for the decision centres “stability for the investment community”, making Great Britain a “low-risk place to invest in renewables”, per a statement from head of research, Western Europe & India at Aurora Energy Research, Marc Hedin.
Chris Matson, partner at LCP Delta, agreed that the announcement “significantly reduces investment risk and increases the likelihood of achieving the Clean Power 2030 ambition”.
Unsurprisingly, given the renewed promises to focus on how best to utilise battery energy storage in the power system (an issue raised by Zenobe’s Georgina Morris-Rowbottom in a LinkedIn post the day before the announcement came), the storage industry has been supportive of the government’s decision.
Aazzum Yassir, director of technology & operations at Pulse Clean Energy, called the choice “pragmatic”, stating, “the government’s decision provides greater stability at a critical juncture in the UK’s energy transition”.
Solar Energy UK stated that regional pricing zones would have made the price of power “a postcode lottery” (the rhetoric adopted by the majority of those opposing zonal). The solar industry trade body said it supports the rejection of zonal pricing and looks forward to the promised launch of a consultation on how to make better use of battery energy storage in the electricity system.
Energy analysis firm Cornwall Insight’s principal consultant Kate Mulvaney pointed out: “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.”
The current electricity pricing system uses half-hourly updates to set the cost of electricity to correspond with the highest-priced megawatt at that time. While renewable energy electricity is widely accepted to be the cheapest option, when priced in line with gas-powered generation, the benefit gets lost.
As Mulvaney puts it: “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.”
Many of those spokespeople that herald the end of uncertainty brought by the potential for zonal pricing, which energy company Good Energy’s CEO Nigel Pocklington called “a threat to truly renewable tariffs and stability of investment in clean power”, align on the fact that “many challenges remain to address the inherent inefficiencies of the current market design, especially regarding the operability of running a complex and constrained system”, as Aurora’s Hedin said.
Reforming the market without zonal pricing
Investment in the UK’s clean energy will ostensibly lower consumer bills as more renewable energy comes onto the system at a lower cost. The certainty provided ahead of AR7, and indeed the fact that zonal pricing will not be implemented, means a lower strike price is likely, reducing the overall consumer cost.
However, vocal support for zonal pricing from the UK’s biggest energy supplier Octopus Energy highlighted the fact that the rejected option would have had the best customer outcome.
The CEO of Ofgem, Jonathan Brearley, spoke out previously in support of zonal pricing. Ofgem is the UK energy regulator, which has a stated aim of ensuring the energy market works as fairly for consumers as possible – to that end, it recently ordered Octopus to repay wrongful prepayment meter charges.
At the time, he conceded this was not the unanimous view of the regulator, which has put out an unattributed statement that it welcomes the government’s decision “which brings certainty and confidence for the future of the energy system”.
Speaking to Solar Power Portal after the government’s rejection of the zonal pricing option, a staff member at Octopus said: “there’s a feeling of frustration from within the business”.
This frustration comes as “after three years and endless consultations, the only option to cut bills at all has been taken off the table”, according to Octopus Energy’s head of policy, Jack Richardson.
The energy company has pointed out that, far from a definitive decision on market reform, the decision to ditch zonal pricing comes with the opening of further industry consultation that ultimately has little bearing on consumers.
Richardson said: “We’re now back to square one – more consultations, more discussions, more chatter, and a tacit acceptance that some big problems won’t get solved at all. We need concrete bill-cutting policies now. Bills are far too high.”
Greg Jackson, Octopus Energy CEO, said of the decision: “Electricity bills are spiralling and zonal pricing would have reversed that.
“The government and generators need to come up with an alternative which will prevent the now seemingly inevitable price rises that will hit over the next few years.”
