Zonal pricing has once again become a topic of debate after a group of 11 trade groups wrote an open letter criticising the proposition, made as part of the Review of Electricity Market Arrangements (REMA).
Addressed to secretary of state for energy security and net zero Ed Miliband and Jonathan Reynolds, secretary of state for business and trade, the letter claims that “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”.
REMA answers to the fact that the current transmission system is fast becoming antiquated, not designed to support the flexibility necessitated by the introduction of variable renewable sources of generation.
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.
However, the letter, signed by clean energy trade associations including Renewable UK and Solar Energy UK, argues that the volatility introduced by zonal pricing would create new risks for clean energy developers. This would lead to increases in the cost of capital, the impact of which would outweigh the purported benefits of zonal pricing.
Other signatories include UK Steel, the Manufacturers’ Organisation and Ceramics UK, speaking to the implications for industrial demand users: “As parts of industry are decarbonising by electrifying, zonal pricing risks undermining these efforts and could increase the risk of deindustrialisation.”
This is because zonal pricing risks increasing electricity prices in the zones where they operate and undercutting the recent policies to bring industrial electricity prices closer to those in Europe, the letter said.
The letter claims that the ongoing review is reducing investor confidence, undermining the government’s Clean Power Mission. Instead of courting the threat of market volatility, the industry’s letter asks that the government rule out zonal pricing and commit to a Reformed National Market (RNM) programme in the Autumn.
Chris Hewett, chief executive of Solar Energy UK, said: “The solar industry fully supports the Government’s clean power mission and is confident that we can treble solar by 2030, provided the right policy framework is in place.
“However, along with other co-signatories, we are concerned that the current proposal for zonal pricing in the REMA consultation will undermine investor confidence and curb deployment of renewables, putting economic and decarbonisation goals at risk. Reforming the electricity market through evolution, not revolution, would be the wiser course.”
The letter concludes: “Incremental reforms under an RNM programme, including reforms to transmission network charges and system balancing alongside strategic buildout of energy networks, will best support clean growth opportunities for the UK’s existing, and future, energy intensive industries whose locations are determined by a range of factors delivered by existing locations, most notably its workforce.”
In favour of zonal pricing
Responding to the open letter, Caroline Bragg, CEO of the Association for Decentralised Energy (ADE), argued that “Studies show that zonal pricing could deliver up to £59 billion in consumer savings by 2050. After years of debate, no credible alternative has emerged”.
In direct contrast to the opinion put forward by the open letter, the ADE states that it is radical reform that will enable the clean energy transition. Zonal pricing could encourage investment in renewable energy where it is needed, driving the creation of clean energy infrastructure and reducing the need for costly grid upgrades.
The suggestion is that areas with high prices and low generation would seek renewables development in order to drive costs down, while industrial development would be attracted to cheaper areas, bringing income and employment with them.
Bragg added: “Incremental reforms, such as network charging changes, fall short of addressing the UK’s urgent need for a cheaper, more efficient system that supports renewables and delivers energy security.”
Greg Jackson, founder of Octopus Energy, the UK’s largest electricity supplier, also endorsed zonal pricing. He said: “Without locational pricing, electricity costs will continue to spiral, guaranteeing industrial decline. There are many ways to meet the needs of these vested interests without caving to their corporatist lobbying at huge expense to over 30 million homes and businesses.”
While ambitious change perhaps threatens short term confidence, with some commenting that the Labour government should not be so sweeping in its early days in power, it could be argued that the government and Department for Energy Security and Net Zero (DESNZ) have, since the election, signalled enough support for the clean energy transition that REMA can afford to be a little radical.
