Zonal pricing aims to create regional electricity pricing based on local supply and demand dynamics, rather than maintaining a uniform national price.
While this approach may improve market efficiency, it also presents some significant cost and investment risks, especially for consumers located in the traditional industrial areas of the UK.
What is Zonal Pricing?
Zonal pricing is an electricity market reform that seeks to establish different price zones across the country. These zones would reflect the cost of generating and delivering power in each region, as opposed to the current system, where all consumers pay a uniform wholesale price regardless of location.
Key drivers for zonal pricing include:
- Reducing congestion on the national grid.
- Encouraging generation where demand is highest.
- Incentivising more efficient energy use.
What are the benefits to Zonal Pricing?
Under the current system the National Energy System Operator (NESO) is often forced to pay curtailment costs, whereby owners of generation assets are paid to turn down during times when the total UK supply is expected to exceed demand.
In many cases, this involves turning off cheap renewable generation (such as wind turbines in coastal regions) as there is no way of effectively storing or transporting that excess power to a higher-demand area.
This means that those in higher-demand areas are using electricity from more expensive generation sources, whilst at the same time cheaper assets are being paid not to produce. The net effect is that the UK’s cost of producing electricity is higher than it needs to be.
Under Zonal Pricing, areas with high renewable generation and lower demand would have lower prices (reflecting the abundance of cheap local electricity). Any surplus would be transported to areas of high demand, reducing their reliance on more expensive generation assets, and bringing down their costs as well.
What are the potential drawbacks to Zonal Pricing?
In similar Zonal Pricing systems operated in Europe, industrial energy users in high-cost zones have experienced price increases ranging from 5% to 20%. If a similar pattern emerges in the UK, large energy consumers in central areas (traditional industrial regions) could face substantial rises in operational costs.
Creating a system where every consumer could benefit from cheaper prices would therefore require significant upgrades in the UK grid, in order for surplus renewable power to be stored and/or transported across the country.
The LCP Delta report, commissioned by SSE, assessed the expected benefits of Zonal Pricing under NESO grid investment plans. The report highlighted:
- The cost of required grid upgrades under the “Beyond 2030” initiative will significantly reduce the projected savings of Zonal Pricing from £5-£15 billion to £0-£11 billion between 2030 and 2050.
- Even a small increase in the cost of capital for renewable energy projects (under 1%) could eliminate the supposed economic benefits of Zonal Pricing.
This means that in the short-term, the vast majority of consumers (those based in higher-demand areas) will likely face increased wholesale prices. And in the long-term, the cost of upgrading the grid (which will almost certainly be passed on to the consumer) might wipe out any wholesale price benefit.
What should I do if I’m likely to be affected by this?
While Zonal Pricing aims to improve energy market efficiency, it presents substantial risks for many energy-intensive users.
Potential price increases, investment uncertainties, and even the risk of industrial migration must be carefully managed. Businesses should proactively develop strategies to navigate this evolving market landscape, including:
Optimising Procurement
- Consider flexible energy contracts that allow adaptation to price fluctuations
- Explore on-site generation (e.g., solar panels, battery storage) to reduce reliance on grid electricity
- Participate in Demand-Side Response schemes to optimise energy usage during off-peak periods.
Engaging in Policy Discussions
- Advocate for mitigation measures, such as support for high-energy users.
- Influence zonal boundary decisions to ensure fair pricing allocations.
- Push for continued investment in grid infrastructure to reduce regional disparities.
Energy Efficiency Measures
- Conduct energy audits to identify inefficiencies.
- Invest in high-efficiency equipment and process improvements.
- Implement smart monitoring systems to track and manage energy use more effectively.
If you and your business would like support in any of these areas, or would like to discuss Zonal Pricing further, then get in touch with us today at info@lcutility.co.uk
