Energy secretary Claire Coutinho is tomorrow (12 March) expected to formally announce the introduction of a new zonal pricing mechanism in Britain.
According to various media outlets, including The Telegraph, the scheme is hoped to incentivise the development of wind and solar assets on farmland around cities so that more densely populated areas can access cheaper renewable electricity.
Zonal vs. nodal market
Two locational pricing mechanisms were considered as part of Britain’s Review of Electricity Market Arrangements (REMA) – zonal and nodal.
A zonal market charges all consumers within a defined zone or region the same price, splitting electricity prices across a few large regions. Unlike its counterpart, nodal pricing determines prices across many more locations on the transmission grid, called nodes.
In a report commissioned by energy regulator Ofgem to assess the cost benefits of a more locational energy market in Britain, management consultancy FTI Consulting and market researcher Energy Systems Catapult issued an example map to illustrate the structure of both a nodal and zonal market in Britain.
A nodal market would be split into roughly 850 nodes, whilst a zonal market would only be split into seven.
This means a zonal market would require a much simpler market clearing process than a nodal market as it only considers transmission capacity limitations between roughly seven zones rather than over 800 nodes.
This was recognised in the REMA Consultation, which ran from July to October 2022, and found some respondents felt the lack of complexity and circumventing needed for central dispatch gave zonal pricing an edge over its counterpart.
Additionally, zonal pricing is already in place in continental Europe (such as Italy and Sweden) meaning it is well-precedented.
The report also found that consumer savings could range between £15 billion and £31 billion between 2025 and 2040 were a zonal market mechanism to be implemented.
Splitting market splits opinions
Reports suggest that the introduction of zonal pricing is likely to cause controversy both amongst renewable energy operators and consumers by creating pricing disparities.
Under the new scheme, electricity generators would be paid different rates according to the distance between assets and consumers, reported The Telegraph.
Additionally, the disparity of renewable energy generation sites throughout Britain would see some customers paying more for their energy due to where they live.
Consumers in Scotland, which houses the majority of the UK’s onshore wind capacity (over 60%), would enjoy lower energy prices due to the higher volume of wind capacity; however, a briefing note written by Simon Gill and published in conjunction with the Scottish Futures Trust warned that this could intern decrease revenue for generators in Scotland.
