Image credit: 123RF
The UK’s Department for Energy Security and Net Zero has taken a decision to reform the existing national pricing system rather than change to a system of zonal pricing.
The decision forms part of a national market reform package and follows an extensive consultation process that began in 2022.
The outcome of the three year debate is the government opting to retain a single national wholesale price. This means all areas in Britain will continue to pay the same wholesale price for energy no matter the proximity to where energy is generated.
The reasons, stated in a press release, are to ensure certainty for businesses and to create fairness and value for consumers.
Ultimately, the reforms announced this week will see the government take on more responsibility for planning where clean energy infrastructure is located, and work to ensure the best spread of new projects across land and sea.
More news from the UK:
Flexibility delivers £300m in savings for UK bill payers says ENA
UK’s Industrial Strategy promises investment certainty for clean energy – can it deliver?
The key parts of the reformed national package include:
- The government has confirmed that the Strategic Spatial Energy Plan is to be published next year by NESO. This will speed up development, cut grid connection waiting times and help to reduce costs, giving investors confidence in where to build and when.
- The government will work with Ofgem to review Transmission Network Use of System charges to provide stronger incentives for investors to build generation where it is needed. This will include changes to make existing charges more predictable for investors.
- The government is also working with NESO to launch a consultation later this year on further reforms that will help to reduce the need for constraint payments. One potential measure could give NESO better access to smaller assets, such as battery storage sites, that can offer greater flexibility when balancing the grid.
- NESO are also currently working with the wider industry to explore further options to help reduce the need for constraint payments – as part of their Constraints Collaboration Project.
Reforms for clarity or resolution?
The response to the UK government’s announcement has been mixed, with many industry stakeholders agreeing that the measures provide much needed clarity. However, some are undecided as to whether it will do much to solve the current strain on the system or help lower costs for consumers.
Kate Mulvany, Principal consultant at Cornwall Insight, provided comment: “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.
“While our modelling of zonal pricing highlighted valid concerns around investor confidence, cost of capital, and risks to existing projects, stepping back from zonal pricing does not, in itself, constitute a strategy. Many of the same challenges identified when the Review of Electricity Market Arrangements (REMA) programme began three years ago persist to this day, only now we have less time to resolve them.”
Mulvany called for government to keep the customer at the heart of all reform and 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.”
Lucy Whitford, managing director of RES UK&I, referred to the market reforms as a “once-in-a-generation moment” that will allow the UK to “deliver an electricity system that is fit for purpose: clean, cost-effective and built around the needs of consumers.”
Greg Jackson, CEO of Octopus Energy, has been openly pro-zonal pricing, and has stated his concerns about the decision on social media platform X. “Zonal pricing would see prices fall everywhere. Unlike today’s postcode lottery which punishes Wales, Northern England, Scotland – the home to so much generation.”
He adds: “There’s a real risk now that we have walked away from a plan that would bring down bills by 100-150 pounds per year as early as 2028 with any plan about what we’re going to do instead”
Phil Hewitt, Director at Montel Analytics, welcomed the end of the debate, stating: “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.
“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.
Hewitt 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.”
Hewitt believes the decision is merely the beginning of the debate, however, due to the uncertainties around transmission charges and the evolution of the balancing mechanism.
Originally published on Power Engineering International.
