As the review of electricity market arrangement (REMA) nears close, consultancy AFRY and nonprofit Regen have weighed in on zonal pricing.
Concluding a study on the possible new market arrangements discussed under REMA, AFRY found that a zonal market may lead to significant net overall costs but will have higher benefits than lower-risk options.
The REMA consultation is, or was, one of the most ambitious on record, with the initial scope of changes including doing away with the Capacity Market (CM), reinventing the Contracts for Difference (CfD) scheme and splitting the wholesale market for different technologies. More or less all of these were ruled out, however, leaving zonal pricing open for debate.
Zonal pricing would see costs dictated by local generation and demand: high generation and low demand would see lower electricity costs localised to the area. Fragmenting the market in this way would better reflect grid constraints.
AFRY has developed two market design options that it says would improve operational efficiency in the national market and compared the potential benefits with zonal market alternatives. It says the potentially higher operational efficiency in a zonal market could be negated by increases in investment risk, implementation delays or the political outcome of EU negotiations.
As part of its Clean Power Action Plan for achieving clean power by 2030, also released at the end of 2024, the government spelled out how much renewable generation and energy storage it estimated would be needed in different parts of the country. Those estimates form part of the methodology through which the grid connections queue will be reorganised this year meaning, in theory, more generation will be built where it needs to be.
Principal analyst at AFRY, Tom Williams, recently discussed how this might negate the need for zonal pricing with Current±.
Instead, AFRY’s study found that improved arrangements for interconnection are most likely to deliver benefits but depend on collaboration between transmission system operators, which could mean EU-level negotiation. Its suggested alternative changes, including improvements for small-scale and storage assets, would have welfare benefits even if zonal pricing were then implemented.
CEO of the UK’s energy regulator Ofgem, Jonathan Brearley, spoke favourably about a shift to zonal pricing on an episode of a podcast. Although this does not necessarily indicate the view of the regulator, Brearley argued it is not “credible” to leave the market as it is.
He said: “It’s not a unanimous view, but by and large, we think that is the best way to create a system that’s adaptable.”
Against a zonal pricing system
Meanwhile, Regen penned an open letter to energy secretary Ed Miliband last week, stating its support for reform within a national market, arguing that zonal arrangement would entail too much implementation and investment risk.
According to the letter, the options REMA presents are “actionable market reforms that can be delivered now to support clean power” or “an ill-defined market reform” risking the governments agenda “in pursuit of uncertain benefits”.
In a LinkedIn post, Merlin Hyman, Regen’s chief executive, wrote: “Embarking on long complex reform process (for uncertain benefits) can only hinder the £40 billion a year investment needed and divert vital time and resources. We will end up with ‘postcode lottery’ of volatile zonal price differences that could damage public support for net zero.”
Back in October 2024, a group of 11 trade groups wrote an open letter to Miliband and secretary of state for business and trade Jonathan Reynolds, criticising zonal pricing. The letter stated, “splitting GB into several regional price zones would undermine investment in low carbon energy and risks penalising the UK’s energy-intensive industries with higher electricity costs in globally competitive sectors”.
Signatories of the letter included wind energy trade body RenewableUK and solar trade association Solar Energy UK.
Speaking to Cameron Murray, senior reporter for our sister site, Energy Storage News, Gore Street Capital partner Alicja Kowalewska-Montfort pointed out that although a zonal pricing system would be helpful to system operators as it unconstrains the system, “zonal or nodal prices send signals to the attractiveness of that node, which creates a piling-on effect, so attractive nodes then become unattractive”.
Kowalewska-Montfort said: “National Grid has generally been very good at implementing changes. They are very rational, but it takes time, so I don’t hold my breath for how long it will take, as there is a lot of pushback from the industry.
“I fully appreciate and support the idea, but to solve it, a combination of zonal characteristics and the right buildout of grid infrastructure is needed.”
