It’s time to move on from the zonal pricing debate
Author: Martin Pibworth , Chief Commercial Officer
Clean power mission
The new UK Government has set the energy industry a massive challenge: help us deliver clean power by 2030.
It is a laudable aim that would make the UK the first major world economy to decarbonise its electricity system, and gives the kind of clarity of direction that the industry has craved.
The Prime Minister, Chancellor, and Energy Secretary have also been clear that clean power shouldn’t just provide environmental benefits, it should also be a catalyst for investment and good jobs across the country.
They’ve criticised the UK’s recent record for policy u-turns that spooked international investors and have promised stability and certainty going forward.
And we’ve already seen some welcome investor-friendly actions, such as:
While there is clearly much more to do, these are early, decisive actions that show they mean business.
Review of Electricity Market Arrangements (REMA)
However, despite the welcome emphasis on the Clean Power Mission, one topic continues to loom over everything – the Government’s Review of Electricity Market Arrangements, or REMA. For the uninitiated, REMA has been ongoing for over two years now, and after much consultation one of the key outstanding considerations is whether to split Great Britain into several ‘zones’, each with their own electricity price (known as zonal pricing).?
The cases for and against zonal pricing have been much debated. At SSE, we (alongside a host of other industry players, energy users and investors ) have been clear on the negative impacts that introducing instability through zonal pricing would have: at best it would create a distraction when we need laser focus on delivery, and at worst it could actively hinder the Government’s Clean Power Mission, and the benefits that would flow to communities across the UK.
While the protracted zonal debate has already been damaging to the UK’s reputation for policy certainty, perhaps more alarmingly the case that has been made in its favour has been based on an outdated view of the electricity system – conveniently ignoring the high-profile programme of grid infrastructure projects being built as we speak that will transform the electricity system in Great Britain.
Electricity grid plans beyond 2030
We’ve published analysis we commissioned from LCP Delta, looking at the impact of these latest grid plans from the National Energy System Operator (NESO) – the ‘Beyond 2030’ plans published in Spring 2024. The previous modelling for the UK Department for Energy Security and Net Zero (DESNZ), published in March of this year, was undertaken by LCP Delta but used grid plans dating back to 2022.
You can see the new Zonal Pricing Report's findings , but they highlight an incoherence in GB energy policy over the past two years. As the analysis points out, building out the grid while at the same time developing plans to split the market doesn’t make sense.?
The case for zonal pricing to date has been based on current constraints and system balancing costs – but these are products of under-development of grid capacity over the last decade which is now being put right.
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The LCP Delta analysis highlights when accounting for the latest grid plans and the strategic deployment of offshore wind locations based on existing seabed leases, the purported benefits of zonal pricing are non-existent, if interconnector reforms can be delivered.?
And that’s before any investment impact is considered, meaning any negative impact on investment as investors price in the increased risks would turn zonal pricing into a cost. Adding just a single percentage point increase to the cost of capital to upcoming investment would make a switch to zonal pricing a potential ￡19bn net cost to the system over 2030-50 – up from ￡12bn under the previous grid plans.
This may seem like a future impact of an upcoming policy choice, but unfortunately the indecision on zonal has had a cost and is undermining investment in the UK’s low-carbon infrastructure today. The action plan to deliver the Clean Power Mission is a chance to bring back coherence to GB energy policy with a sharper focus on removing overhanging risks and barriers to delivery and investment.
Interconnectors reform
The importance of interconnectors reform in the analysis raises an important point for the next steps of the REMA process – future congestion in the GB electricity system with its upgraded grid will be driven by interconnectors in the South of England, not Scottish wind.?
There are better – and quicker – ways to deal with interconnector operation in one corner of the country than splitting up the electricity market. Changes to how interconnectors operate can be part of a package of incremental reforms under a Reformed National Market (RNM) programme (the name for the alternative route to zonal pricing being considered by the Government), which can deliver significant benefits to consumers well ahead of 2030.?
It’s not about protecting the status quo, far from it. We can deliver reform but in a way which minimises disruption to investment that would come with a radical and counterproductive change like zonal pricing.
Focus on delivery and investment
The UK Government’s Autumn Budget will understandably dominate headlines this week, but next week will be an important moment for the Clean Power Mission. It is when the NESO will set out pathways to get to 2030, before the new Mission Control in DESNZ sets in motion its Clean Power Action Plan – unlocking a huge amount of infrastructure investment across the country.
We look forward to it being a case study in good policymaking which enables investors and industry to unlock all the benefits of the country’s remarkable renewable resources at pace and without unnecessary distraction – and central to doing that will be resolving REMA.
SSE is ready to play our part, with an investment programme that is already c.￡20bn with a pipeline of projects worth billions more being developed. We know the investment appetite is there to match government’s increased ambition for 2030 – key now is to ensure that the policy approach is aligned to the political intent.
More from SSE:
Researching Hydrogen and Electricity Grid Interaction
3 周I think Sweden's electricity system is somewhat ahead of the UK. Hydro, nukes and wind make carbon-minimal baseload plus spare to export when it's windy (and not minus 30!). Sweden is also deploying large-scale hydrogen to decarbonize steel-making and possibly also e-fuels for aviation and shipping and also fertilizer. Goodie! Once you have loads of hydrogen production load, why not flex some of it to provide grid-services like frequency response. And store it for seasonal arbitrage. You could even develop hydrogen-conversion CCGTs to help with stability.
Grid Connection, Electricity Regulation Leadership
3 周Objective of zonal pricing to give locational signals to generators. These are currently done by TNUoS charges which are divided zonally. Both of them don’t work in moving the renewable generator anywhere as wind resources are concentrated in one part of country due to geography. You cannot import Scottish wind in middle of London. The very idea that I will help to remove congestion is flawed. Only way you remove congestion is either building network to match power transfers, building long duration storage or don’t build generators. Other option will include someone losing money and increasing uncertainty in their business case.
Director at Regen
3 周Meanwhile we don’t have to wait 5 years for zonal see https://www.dhirubhai.net/posts/jamesjohnston53_piclo-localconstraintmarket-activity-7257069625291550721-VD_u?utm_source=combined_share_message&utm_medium=ios_app&utm_campaign=copy_link
Energy markets and regulation | The Substation Podcast
3 周Is there any more detail on how the interconnector reforms would work in practice? Keen to understand that... I had a look and I can see estimates for potential system benefits, but am struggling to get my head around the 'how'? How could redispatch be governed, how would we pay for it (isn't that just another source of constraint costs), what would happen to traders that had bought capacity on interconnectors, how would it received by our neighbouring TSOs and the EU more generally (esp when we want re-integration post Brexit?) And more fundamentally, it's not just interconnectors that are causing these issues in future - its storage, DSR and other kinds of flexibility. Interconnectors are the easiest things to point to because they're big whopping wires under the sea, but if we're talking about these kinds of interventions for interconnectors, should we also be proposing for anything that provides two-way flex?