In an update on its Review of electricity market arrangements (REMA), the government on Thursday (10 July) said that zonal pricing would create uncertainty for power producers, potentially jeopardising investment.

Zonal pricing would involve creating different geographical units each with their own set electricity price, replacing the current system where the price of electricity is the same across GB.

Renewable UK, an industry body for renewable power producers, said the government’s decision “will give confidence to private investors that the UK is one of the best markets in the world to build new renewable energy projects, by ending the uncertainty that zonal pricing would have caused”.

In contrast to a “costly zonal pricing regime”, the certainty the market has now will mean that Clean Energy projects will continue to be built in GB, resulting in reduced exposure to volatile international gas markets, the body noted.

Also welcoming the announcement, Minesh Shah, managing director of The Renewables Infrastructure Group, an investment company with more than 3 GW of wind, solar and battery assets under management across Europe, said that shelving zonal pricing enables the focus to shift to grid reform.

He welcomed an announcement by the energy regulator Ofgem earlier this month signalling that it is likely to allow GBP 24bn of investment in UK energy grids, including GBP 8.9bn on the electricity transmission grid network.

Up to GBP 4bn of constraint payments, which involves paying power producers to reduce their output at times to ensure a stable grid, could be avoided by 2030 if critical grid upgrades are completed by then, the government said in its announcement on Thursday.

Waste of money?

But Octopus Energy, which has a large portfolio of battery and renewables projects in the UK and overseas as well as an electricity retail business in the UK, has been campaigning for zonal pricing and unsurprisingly hit out at the government’s decision.

It bemoaned the idea of investing in “unnecessary, costly grid infrastructure”, adding that zonal pricing could result in bill savings of GBP 3.7bn to GBP 5bn a year.

According to a report by FTI Consulting commissioned by Octopus, zonal pricing would result in a greater use of batteries, with local price increases acting as a signal for them to discharge electricity and lower prices for them to charge.

In response to claims that introducing zonal pricing would create uncertainty ahead of its implementation, Octopus said that the new system could have been in place by 2028, pointing to Sweden, where it took 15 months to develop zonal pricing.

The division of Sweden into four electricity price zones, the cheapest of which is generally in the far north of Sweden where demand is lowest, took effect in 2011.

Other energy sector players to have come out in support of zonal pricing include asset manager Gresham House, a major owner of battery storage as well as solar and wind.

It earlier this year described zonal pricing as “an essential step” for the UK electricity market. Rather than investing in expensive grid infrastructure to transmit electricity for example from offshore wind farms in Scotland to England, investing in more batteries to increase supply in constrained areas would reduce constraints in areas of high demand, it noted.

A zonal pricing system could also have the effect of increasing industrial and residential investment in areas of high renewable generation, Gresham noted.

Meanwhile, Jason Mann, who leads FTI’s Regulated Industries and Energy Markets group told Infralogic the government ruling out zonal pricing is a “bad decision for the UK consumer, but a particularly bad decision for the Scottish consumer and its economy, which could have benefited from much lower electricity wholesale prices had zonal pricing gone ahead.”

Nevertheless, Gresham’s head of energy transition Ben Guest told Infralogic following the government’s decision not to go for zonal pricing that “it’s good to have clarity”. It is now necessary to have a balancing mechanism that will “work properly”, he said.

The balancing system is run by the government through the National Electricity System Operator (NESO). It pays power producers to generate electricity needed to keep the grid running and at times to stop producing electricity when the grid is at capacity.

Alternative measures

The government as it outlined alternatives to introducing zonal pricing said it could give NESO increased access to battery storage sites, which would give it greater flexibility as it seeks to balance the grid.

It will also look at options to help it reduce constraints payments where power producers are paid to stop producing electricity. Octopus claims that the UK has spent nearly GBP 700m this year paying for wind farms to be turned off and for gas plants to be fired up as part of the balancing mechanism.

The government’s indication that it will look at measures other than zonal pricing to reform the electricity market was welcomed by another battery sector player, Chris Elder, chief executive of EIG-backed energy storage platform Fidra Energy.

Noting that there are pros and cons to zonal pricing, he said that uncertainty for investors created by implementing zonal pricing would outweigh any positives.

Similarly, the Energy Storage Association (ESA), an industry body for battery operators and other energy storage players, also sees both sides of the argument.

“While zonal pricing undoubtedly had some upsides for energy storage, with potential for larger regional spread and increased arbitrage opportunities, its removal eliminates a potential source of revenue volatility for battery and long-duration energy storage projects,” it noted.

“Zonal pricing has been considered as part of the UK government’s REMA programme since 2002; while it was an important topic to consider, grid-scale energy storage operators also seek certainty in energy network connectivity, the associated network charges and the enduring market framework,” the ESA’s senior policy lead Mark Coyle told Infralogic.

“The detailed document published by the government today provides an important roadmap for much-needed measures to develop the grid,” he added.

The government’s announcement on Thursday will effectively end the discussion on the merits of zonal pricing, but the best way to implement reforms as the government looks to manage the energy transition while keeping a lid on bills will continue to be hotly debated.