This article was edited on 13 March to correct an error. The introduction of zonal pricing in Britain has not been confirmed but has been maintained as an option in the second Review of Electricity Market Arrangements consultation.
Energy secretary Claire Coutinho has announced that a zonal pricing system could be introduced in Britain and confirmed the UK government’s support for new domestic gas power plants.
Today’s announcement (12 March) confirms reports circulating yesterday that the Department for Energy Security and Net Zero (DESNZ) is looking to introduce stronger locational signals in Britain’s wholesale market to incentivise the development of renewable assets around cities so that densely populated areas can access cheaper renewable electricity.

A zonal market splits electricity prices across a few large regions – as illustrated in an example previously produced by management consultancy FTI Consulting and market researcher Energy Systems Catapult – all consumers within a defined zone or region are then charged the same price.
The new scheme would also see electricity generators paid different rates according to the distance between assets and consumers.
According to FTI Consulting and Energy Systems Catapult’s aforementioned report, commissioned by Ofgem, consumer savings could range between £15 billion and £31 billion between 2025 and 2040 if a zonal market mechanism was implemented.
The government commissioned its own report through accounting firm Grant Thornton and business management consultant LCP Delta to assess the impacts of alternative locational investment and operational signals under locational pricing.
For this study, the country was split into 12 zones that “capture the key transmission network boundaries used”.
According to the report, under DESNZ’s net zero higher demand scenario (where annual electricity demand levels reach 700TWh by 2050), a locational pricing mechanism would decrease Britain’s electricity system costs by £5 billion (Net Present Value in 2022 real prices) between 2030 and 2050 “with redispatch inefficiencies in the national pricing counterfactual removed and £15bn where redispatch inefficiencies are assumed in the national pricing counterfactual”.
Consumers would see a significant reduction in their costs under a zonal pricing mechanism, as the study estimates a reduction of £24 billion and £59 billion for the higher demand and lower demand (reaching 525TWh by 2050) net zero scenarios. This, however, would result in a £19 billion and £44 billion producer cost increase, respectively.
“This shows a system benefit from moving to locational pricing with costs transferred from producers to consumers. The drivers of these benefits are split into two types: investment efficiency, where more efficient locational signals cause plants to locate in areas more beneficial to the system, and operational efficiency, where cost savings are a result of changes in the operation of the market (regardless of plants changing location),” wrote DESNZ in the ‘System Benefits from Efficient Locational Signals’ research paper, published today.
Additionally, zonal pricing is well-precedented, as it is already in place in European countries such as Italy and Sweden.
“It is increasingly clear that the only way we can get to a net zero electricity system in time and without pushing up bills is to move to a market that reflects local supply and demand,” said Guy Newey, CEO at Energy Systems Catapult.
“It is an essential step forward to see government proposing stronger locational signals in the wholesale market through zonal pricing and a strong push for a smarter energy system.”
Newey also expressed his disappointment in seeing nodal pricing ruled out as “improved locational signals will deliver significant benefits to consumers and opportunities for innovators”.
Nodal pricing was the second locational pricing mechanism considered as part of Britain’s Review of Electricity Market Arrangements (REMA). It would determine market prices on a much more micro-level according to roughly 850 areas on the transmission grid called ‘nodes’, each with an individual price.
However, the complexity of the mechanism would require much more time to implement, causing more upheaval in the process than a zonal market would, a point noted by a number of respondents in the REMA consultation.
New gas power stations
The energy supply plan DESNZ set out today also includes support for building new gas power stations in Britain, a move Coutinho has labelled a “common-sense decision” for the nation’s energy security.
“There are no two ways about it. Without gas backing up renewables, we face the genuine prospect of blackouts. In recent years, other countries have been so threatened by supply constraints that they have been forced back to coal,” Coutinho is expected to say later today, according to a release from DESNZ.
“There are no easy solutions in energy, only trade-offs. If countries are forced to choose between clean energy and keeping citizens safe and warm, believe me they’ll choose to keep the lights on.
“We will not let ourselves be put in that position. And so, as we continue to move towards clean energy, we must be realistic.”
Prime Minister Rishi Sunak backed the energy secretary, adding: “I will not gamble with our energy security. I will make the tough decisions so that no matter what scenario we face, we can always power Britain from Britain.”
As part of the second REMA consultation, the energy secretary laid out plans to bolster gas power capacity by “broadening” existing laws requiring new gas plants to be built net zero ready by being able to convert ‘low-carbon alternatives’ such as carbon capture and hydrogen.
“In scaremongering about ‘blackouts’ from renewables the Energy Security Secretary appears to be getting her energy policy advice from conspiratorial blog posts published circa 2010,” commented Nigel Pocklington, chief executive at renewable energy supplier Good Energy.
“It makes no sense to be pronouncing new gas generation when we are still recovering from the shock of the UK’s unique exposure to global gas prices. Let alone when the UK’s cheapest source of power, onshore wind, is effectually blocked.”
The second REMA consultation opens
Today’s announcements mark the opening of the second REMA consultation, which will run until 7 May 2024. The consultation will seek views on a narrow range of electricity market framework delivery options.
Within the consultation document, the government confirmed that nodal pricing has been discounted as a viable option for Britain.
Government proposals also include retaining an updated Capacity Market with the bolstered participation of low-carbon technologies and continuing the Contracts for Difference (CfD) model.
This follows the Spring Budget last week, which confirmed that the budget for the latest CfD auction round (AR6) will surpass £1 billion.
“We need urgent action to ensure energy security in a future net zero system. Well-designed market reform and accelerated network build would mean renewable electricity can meet more of our needs more often. The final few hours of energy demand each year will always be the hardest to decarbonise,” said Dan Monzani, managing director UK & Ireland at Aurora Energy Research.
“So we need to double down on firm low carbon technologies, like nuclear, carbon capture and long-duration storage but we also need to invest in maintaining reserve gas capacity. In a net zero system in 2035, we will need to run gas 90% less often but we still need to maintain two-thirds of the current gas capacity to ensure our energy needs are met at all times.”