UK zonal pricing: a “win-win-win” for decarbonisation, growth & investment, and fiscal prudence

The new UK government has hit the ground running on net-zero – a successful AR6; removal of the de facto onshore wind ban; establishment of Mission Control, GB Energy, and the National Wealth Fund; passage of the UK SAF Mandate, etc. – putting the country back on its pioneering trajectory on decarbonisation.

However, most of the public debate about net-zero is centred on “spend more”: assets, infrastructure, new technology. That’s all much needed. But as capital is scarce we know that ”spend more” will have its limits.

Let’s ensure we have a framework in place to ensure we “spend smarter” to encourage investment, drive lower system-wide energy costs, and save money for the public purse.

Fortunately, one such policy is currently under consideration by the UK Government: zonal pricing reform under Department for Energy Security and Net Zero 's Review of Electricity Market Arrangements (REMA).

Zonal pricing promises to better reflect the regional balance between power supply and demand, reshaping wholesale power prices as a result. It will create a clear incentive for new demand to locate where the power is, and for new power to be developed closer to demand. It can help drive reindustrialisation in the parts of the country that will benefit from much lower power prices than today.

Specifically, zonal pricing will create three immediate benefits:

1: Substantially reduced curtailment payments to renewable power producers. The UK incurs curtailment payments of over ￡1bn per annum, due to insufficient transmission capacity and renewables being produced far away from demand. This figure is expected to rise north of ￡3bn annually by 2030.

Zonal prices create localised price signals, attracting power demand to the regions with excess renewables and incremental power supply to areas with lots of demand. This would reduce the need for hefty curtailment payments to renewable operators due to grid congestion.

Greg Jackson is right: “[You have] a valuable commodity – clean electricity – that you throw away rather than sell it cheap to the people that could have it.”

2: A smarter distribution of grid investments. By the same token, localised price signals will ensure investments in the transmission grid – something that is vitally important for the energy transition – are taken where they make the most sense. Today the UK is planning the Eastern Geen Link (EGL) projects to move renewable power from north to south, likely at a cost of more than ￡15bn, among many other grid investments. How much of that investment could be saved or redirected elsewhere if zonal pricing attracted new demand – new industry, new jobs – to where the power was already cheapest?

3: A much lower subsidy bill for green / electrolytic hydrogen projects under the Hydrogen Production Business Model (HPBM). To decarbonise activities that cannot be electrified, the UK Government has a target of delivering up to 6GW of electrolytic hydrogen production capacity by 2030 through the Hydrogen Allocation Round (HAR) process. Given the prevailing prices for renewable power in the UK, reaching 6GW of electrolytic hydrogen will represent a commitment of ￡80-96bn in subsidy support between now and 2045.

Zonal pricing, paired with a hydrogen transmission network, can reduce this subsidy bill by two-thirds. Depending on the wholesale power price under zonal pricing, we estimate the cost of electrolytic hydrogen production in regions with excess renewables could potentially come down to ￡3-4/kg. This reduction could shave ￡3.5-4bn per year off the annual subsidy bill under HPBM for 6GW of electrolytic hydrogen capacity.

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This is only the beginning. What other investments and industries will be attracted to parts of the country with some of the lowest power costs in all of Europe?

DESNZ is meant to give its decision on zonal pricing by summer 2025. We hope the UK Government appreciates the economic advantages that will accrue to the UK from zonal pricing reform under REMA: accelerated decarbonisation, lower system-wide energy costs for consumers and businesses, and an improved fiscal position.

It can move the net-zero debate on from “spend more” to “spend smarter”.