Perhaps the most hotly-awaited announcement of the year will be the outcome of the review of electricity market arrangements (REMA).
The scope of REMA has reduced over time. Now, as energy secretary Ed Miliband told BBC Radio 4’s Today programme, “there are two options, zonal pricing and reformed national pricing”.
In an article published to Substack by CEO of the Energy Systems Catapult Guy Newey (in which he argues for zonal pricing) calls REMA “the most vicious policy fight” he has witnessed in the energy sector, one that he has lost friends over.
The need for REMA is not up for debate. It seems that every other element is, though.
Zonal pricing ‘doesn’t do what it says on the tin’
Solar Power Portal heard from Johnny Gowdy, director of Regen and author of the recently published paper Do consumers dream of market reform? Why public reactions to zonal pricing should be carefully considered, who makes the case for reformed national pricing.
Regen is a non-profit energy organisation focused on delivering the energy transition fairly and at pace, which is funded by subscription-based membership options and its advisory work.
Currently, electricity is priced by the most expensive to generate unit half hourly (often by gas generation). When renewable generation comes online, this means wholesale prices do not reflect the effect of the cheaper mode of generation.
Gowdy says that Regen has come down in favour of “progressive market reform”, or incremental market reforms based on the current national model.
This is “not for want of looking at it”. Over the three years that the REMA consultation has been, in some form, ongoing, Gowdy says that he and his colleagues became “somewhat frustrated that there was a lack of attention to what the counterfactual could be”.
In his view, zonal pricing is “very complicated, relatively high risk and a difficult model to implement”. Plus, “it doesn’t exactly do what it says on the tin”.
The idea of zonal pricing is easy to conflate with a local market—an area powered by the renewable energy generated within it, meaning those living locally to wind farms benefit from cheaper energy, a concept that Gowdy says “resonates” with people.
Price differences in a zonal market, he explains, “are certainly impacted by renewable generation but are essentially caused by network transmission constraints”.
Rather than recognising the value of local energy or ensuring prices are low in areas of high generation, zonal price differences are driven by the occurrence of transmission network constraints.
In an area where there is sufficient network to transport electricity out to other zones, the zonal price will levelise and converge, set by the marginal generator price across those zones.
Gowdy adds: “Zonal pricing is not so much a postcode lottery but more a network constraint lottery. A key point is that network constraints will change as we go through the transition.”
For Gowdy, strategic planning and connection reform are partial alternatives that are deliverable far sooner than zonal pricing would be. He says that the original idea behind locational marginal pricing (now ruled out as an option for REMA) was that market signals would tell people where to build generation.
“That’s largely been replaced now by the fact that we have a strategic plan, and with connection reform we can practically tell people when and where we want them to connect.
“That’s a whole area that would have been one of the drivers for zonal pricing that has effectively been replaced.”
With indicators of where to build established, the zonal argument has moved to operational signals. This, Gowdy says, can be achieved by making dispatch more efficient, and reforming how interconnectors are built and used.
One of the things Regen is hoping to see is a continuation of the balancing mechanism reform to reduce skip rates. Investment, digitisation and AI would work, Gowdy says, to see low carbon, dispatchable generation, storage and flexibility used at the rate gas currently is.
“I see that as part of the Clean Power Plan as much as building new generation capacity.”
‘Bleating incumbents’ oppose zonal
Vocally in favour of a zonal energy market (particularly on social media platform X) is CEO and co-founder of Octopus Energy, Greg Jackson.
In the nine years since it launched, Octopus Energy has become the largest domestic energy supplier in the UK, offering agile tariffs and using domestic flexibility as a means of reducing the cost consumers pay for electricity.
The company has also partnered with several housebuilders in the UK to build (and retrofit) properties that, thanks to smart, low carbon technologies, are guaranteed to pay nothing for their energy use for a decade.
Jackson’s argument, put forward in an article for the Times, YouTube videos and public speaking opportunities, is that “bleating incumbents” (the Times) are “so desperate to keep the current market because they enjoy their huge earnings regardless of consumer value” (via X).
Zonal pricing would envelop the value of flexibility into the wholesale price, which would see a lot more volatility.
Jackson’s argument, though, is that zonal pricing helps with curtailment, which by 2030 could cost the National Energy System Operator (NESO) £8 billion annually. The reduction in system costs that regional electricity markets introduce would be felt by the consumer.
Speaking at the Innovation Zero World Congress in West London yesterday, Jackson touched on this: “Nobody can say it’s acceptable our biggest offshore wind farm is paid to power down 71% of the time it could be operating.”
In his vision, electricity generated in cheap areas is exported to other regions “but the generator is paid at its region’s low price, not the high national price”, and “areas where it’s windy or sunny get very cheap electricity at those times — while others get a price set by gas”.
Export happens less frequently, anyway, “if energy companies respond to regional pricing by building more efficient infrastructure”, meaning less pylons and cabling. Others have suggested transmission buildout could negate the need for zonal.
Gowdy also makes the point that if the zonal route is taken, there will be a long gap between a REMA decision and the implementation of the reform. However, at Innovation Zero, Jackson cited research by Arup that suggested the reforms could be delivered in 18 months.
It has also been circulated that Octopus Energy’s proprietary software, Kraken, which uses AI to automate flexible electricity consumption, would benefit if flexibility were increasingly tied to the electricity market.
Solar Power Portal reached out to Octopus about this claim, and a spokesperson responded that it is “utter nonsense”.
The company’s press office also directed to a series of posts on X by Jackson, responding to “the same planted question – are you advocating zonal pricing because it will increase Kraken revenue?”.
The spokesperson pointed out that other energy retailers, including E.ON and EDF, use Kraken to offer smart tariffs to their customers.
They added that “zonal pricing would also not result in a market structure complex enough to require the levels of sophistication a software like Kraken delivers”.
“What a zonal system would deliver is higher efficiency and therefore lower costs for consumers. This, in turn, would make clean energy technologies such as heat pumps and EVs more attractive. And yes, this would be good for our business.”
Miliband has stated that his “bottom line” is ensuring energy bills do not increase, and assured that (contrary to alarmist reporting, perhaps) bills in southern parts of England will not go up.
Octopus was recently criticised by Fairer Energy Future, a campaign against zonal pricing backed by trade association UK Steel, when Rachel Fletcher, director for regulation and economics at Octopus, acknowledged on a debate panel that “customers in the Southeast might pay a bit more”.
The statement released by Fairer Energy Future highlighted her saying that the “focus should be on location pricing that matters and drives the majority of benefits of zonal pricing and not the fact that customers in the southeast, on average across a year, might pay a bit more.”
Perhaps this is part of the “smear campaign” that Octopus’ spokesperson said has “shocked and disappointed” the company.
“They’ve been pushing out bad faith accusations, malicious misquotes and dodgy research.”
Considering consumer outcome
Much of Jackson’s rhetoric centres on the consumer. His vision of a zonal pricing system in which “less new grid” is needed actually echoes what Gowdy calls the “logical thing” for consumers to campaign for: “renewables and then campaign against transmission network investment”.
Octopus’ spokesperson said the current system is failing consumers and that zonal pricing is the “only solution on the table” that can bring down energy bills.
Gowdy says that discussion about “consumer benefit” assumes value is passed from producers to consumers, a point of contention because government policy is likely to be required to protect producer revenue—by grandfathering current rights and/or seeing higher Contracts for Difference (CfD) strike prices and cost of capital—or otherwise allow a hiatus in investment and withdrawal of capital from Great Britain.
Jackson would argue this is the view of incumbent energy companies that are threatening loss of investment to maintain the status quo.
Gowdy suggests that the consumer has not had much of a look-in during the debate.
“It’s all been a very technocratic, economic argument about the optimum way of dispatching and operating the system, and I think the consumer has largely been left out of it.”
Octopus’ spokesperson said that zonal is backed by several independent bodies (including the Energy Systems Catapult and Citizen’s Advice) that prioritise consumers over generators.
The CEO of energy regulator Ofgem, Jonathan Brearley, has spoken in favour of zonal electricity pricing, though conceded this is not the unanimous view of the company.
Battery energy storage system (BESS) owners and operators are divided, but Dan Moore, head of BESS asset management at Root-Power told Solar Power Portal that regional pricing risks creating unintentional regional disparities and exacerbating socio-economic divides.
He also said: “The introduction of regional pricing could drastically diminish the attractiveness of battery storage projects in [Scotland] by significantly reducing their internal rate of return (IRR).”
“Everybody’s got a finger in the pie”, Gowdy says. Perhaps this is why, for every statement given as fact by one person, the opposite is just as convincingly argued.
Where Gowdy says there hasn’t been enough consideration given to the counterfactual, Caroline Bragg, CEO of the Association for Decentralised Energy (ADE), last year argued that “after years of debate, no credible alternative [to zonal pricing] has emerged”.
Speaking to Cameron Murray, senior reporter for Energy Storage News, co-founder and director of EV fleet and grid-scale battery storage specialist Zenobe, James Basden, said the “threat of REMA” is “already slowing down the BESS market”.
Like Gowdy, he sees alternative ways to incentivise generation “in the right locations”, through mechanisms like the transmission network use of system (TNuoS) costs.
To Jackson’s comments: “Zenobe competes and grows through innovation, we are not an ‘incumbent’. It’s the uncertainty [of a zonal market] that is our biggest worry.”
There are figures that back up both sides of the argument (perhaps to varying degrees of credibility).
Jackson cites consultancy FTI’s research stating zonal pricing would reduce electricity bills by £55 billion as the “most comprehensive analysis”, but Gowdy’s paper has somewhat counterbalanced it.
Meanwhile consultancy AFRY found that a zonal market would have higher benefits than lower risk options, but the potentially higher operational efficiency could be negated by increases in investment risk, implementation delays or the political outcome of EU negotiations.
Gowdy concludes that the “theoretical benefits” of zonal pricing “do not outweigh the political risk of creating division and resentment between regions of GB, and between consumer groups, and the impact this may have for the UK’s net zero transition”.
Whichever way the decision goes, “this is creating all sorts of hostages to fortune”, he says.
The media will run with the discontent that both outcomes will inevitably meet, without distinction between the way that the electricity market operates and net zero, clean power, or the actions of Ed Miliband in achieving it.
