Zonal pricing: What is the scheme, is it good for Scotland and will the energy system actually happen?

Plans to introduce a “zonal pricing” regime to the UK’s electricity market were recently backed by a House of Lords committee.

Away from the larger debates around GB Energy and the future of the North Sea, there are policies that have garnered far less attention, but could perhaps be fundamental to the green transition.

Zonal pricing is one such scheme being discussed in the halls of Westminster - a system in which Britain’s power market would be split into zones, under which households and businesses pay different rates depending on how close they are to wind and solar farms.

Wind turbines at the Seagreen Offshore Wind Farm off the coast of Montrose, Angus in the North Sea. Picture: Andy Buchanan/AFP via Getty Images

Ministers are expected to make a decision on zonal pricing this summer after lobbying efforts for and against the system have ramped up since Labour entered government.

For Scotland, where so many more wind farms were built while a ban was in place in England, the scheme could be of particular benefit. Some experts believe it would see very cheap wholesale prices for electricity during windy periods, especially in northern Scotland, potentially leading to drivers being incentivised to charge cars, rather than rely on petrol.

However, big energy developers are less enthusiastic, suggesting less certainty over power prices would put them off investing, when the government needs industry more than ever as it seeks to deliver on its clean power targets.

What would the savings be of going zonal?

Right now, the energy industry sets a single price for electricity across the country. Under zonal pricing, there would be a different wholesale electricity price in each area. The system’s advocates say the move would be about making the system more efficient, saving, according to Octopus Energy Estimates, at least £55 billion by 2050.

Speaking to MPs, experts, and energy companies, the view on zonal pricing divides into three camps. There are those who vehemently oppose it, citing concerns over business. There are those who back it, believing it to be good for consumers, and those who are simply non-committal, perhaps due to the strength of feeling from the other two camps.

All of this comes against the backdrop of a new House of Lords committee report warning that unless the UK drastically steps up the scale and pace of building more energy generation and network infrastructure, it is in danger of missing its clean power target of decarbonising the electricity system by at least 95 per cent by 2030.

That same report suggests that regional zonal pricing should enable better use of existing grid capacity and lower the cost of electricity, provided the transition and its risks are managed well.

Why zonal pricing has its opponents

However, not everyone is a fan. RenewableUK, a trade association that works with the UK renewable energy sector, warned the system would be too disruptive and damage the energy sector as a whole.

RenewableUK's executive director of policy Ana Musat said: "Analysis shows that any potential savings from introducing zonal pricing would be more than wiped out by the significant extra costs it would add to building new clean energy projects. The UK government cannot afford to put its own target of clean power by 2030 at risk by bringing in a scheme which would fundamentally disrupt our energy market and deter investors at the very time when we need to pull out all the stops to get new projects built as fast as possible.

“We're urging ministers to rule out zonal pricing before this year's auction for new clean energy capacity so that we can stay on track to meet the UK government's clean power ambitions. At the moment, it’s one of the key risks undermining investor confidence ahead of an auction round in which the government is hoping to procure around 7GW of offshore wind alone".

The view from the islands

These concerns have been felt by MPs. Scottish Labour MP Torcuil Crichton - the member for Na h-Eileanan an Iar - told The Scotsman it wasn’t the “time” for such a scheme.

He said: “With so many big energy companies against it [zonal pricing], my instinct is this must be a good idea, but it’s evident that if we are going to have this investment in renewables, such as the £8 billion in the Western Isles, to lever that kind of investment, the companies have made it quite clear they can’t balance the books if we change the energy price structure. So I suspect the government will come down on an adaption.

“We won’t have the status quo, but we won’t have the zonal pricing. I just don’t think the time is now.”

Mr Crichton pointed to offshore wind farms closing down recently, explaining the supply chain costs were increasing, and suggested such a change could create uncertainty.

He said: “They are so adamant about that, I think it might persuade the government.

“I think the way to reduce consumer bills through renewables is for communities to have a proper share in developments on their doorstep. In the Western Isles, we have seen the council and the community-owned landlord, the Stornoway Trust, negotiating to take a 20 per cent stake in two 200MW wind farms. That would leave them in charge of 80MW. The entire demand is 39, so reducing people’s bills and tackling fuel poverty is the least you can do with this money.

“Renewable energy has the power to transform people’s lives. The big companies won’t get support for their big schemes unless the community wins as well, and I think they’re beginning to recognise that as well.

“That all needs strong direction from ministers that that’s the direction they want to go in, and that means pushing the regulators. I think that’s more achievable right now, than zonal pricing is, because zonal pricing has unintended consequences in terms of getting this renewable infrastructure built at all.”

‘Not against the idea in principle’

Liberal Democrat MPs Alistair Carmichael and Jamie Stone, who both represent rural seats in the north of Scotland, claimed they were not against the idea in principle, but their focus was on the outcome.

Mr Carmichael, the MP for Orkney and Shetland, said: “There is no silver bullet for fuel poverty in the Highlands and Isles. The government has already conceded the case that those living close to energy developments should see a benefit from them. I believe that there is also a fair case for those who have higher energy needs due to climate and geography to get better tariffs as well.

“There are legitimate questions about whether or not the zonal pricing proposals we have heard about are the right solution for the country or indeed for the north of Scotland specifically. What matters for us, ultimately, is the outcome. The goal must be to end fuel poverty once and for all, and whatever the methodology the government uses, that is the metric on which we shall judge them.”

Ed Miliband is believed to be considering zonal pricing

Mr Stone, the MP for Caithness, Sutherland and Easter Ross, the most northerly constituency on the British mainland, agreed.

He said: “The Highland and Islands produce more renewable energy than any other region of Scotland and I have always strongly believed that my constituents should receive shares of community benefit funds. Put simply, individual households should gain benefits from their communities producing and living alongside renewable infrastructure.

“This is why I’m pleased with the concept of zonal pricing significantly reducing bills in areas of Scotland where there is a lot of renewable generation - such as my constituency.

“However, I have also considered the potential conflict this may muster between renewable stakeholders in the far north.

“As this proposal appears to be gathering pace, it would be most interesting to see what the government's response looks like and whether they choose to pursue it.”

Octopus Energy’s backing

There was support, however, from Octopus Energy. The energy firm said zonal pricing was a vital step towards fixing a broken energy system, where UK families and businesses face some of the highest energy costs in the world.

Jack Richardson, head of policy at Octopus Energy, said multiple bodies and regulators supported zonal pricing. He suggested the scheme’s opponents were more worried about hard work than actual disruption to the energy sector.

"Zonal pricing pulls the benefits of cheap electricity production through to bill payers and makes the entire system run more efficiently, slashing billions off the energy system costs overall and therefore cutting bills," he said.

"While Britain has some of the highest electricity prices in the world, and we are trying to persuade the public to go on this journey towards cleaner energy, from wind turbines to EVs and heat pumps, it is absolutely imperative that we get the cost of electricity down and prove that theory of change. Only zonal pricing is going to deliver that.”

Mr Richardson also dismissed suggestions the move could disrupt the energy market.

He explained: “Government, DESNZ [Department for Energy Security and Net Zero], Ofgem, the National Energy System Operator (NESO), and Energy Systems Catapult all did studies, and couldn’t find anything to suggest that zonal pricing would disrupt investment in renewables."

The mooted 2030s timeline - is it accurate?

Last month Energy consultancy Cornwall Insight said the measure could even take until the mid-2030s to be implemented.

However, Mr Richardson disagreed. He said: “Sweden did this in 15 months. We nearly, as a UK government, nationalised the steel sector in a weekend. It may be complicated, but as soon as we make the change we will start feeling the benefits. We think you can do it in two years.”

Mr Richardson also argued it was of a particular benefit to Scotland, as the country built “a lot of really cheap electricity in the form of wind farms when England banned it”.

He said: "Households as well as businesses, from your corner shop, right up to your steel plant, they're all consumers, so they all benefit from zonal pricing, because zonal pricing tackles massively rising system costs.

“Everywhere gets a bill cut. Businesses are in desperate need of lower electricity bills, and this is the one option on [UK energy secretary] Ed Miliband’s table right now that will cut electricity bills and, more importantly, avoid massive price rises. We need to remember that Clean Power 2030 relies on the interconnectors working properly, they won't without zonal pricing.

“Anyone who isn’t an incumbent beneficiary of the current system or isn't paid by one thinks this is the right thing to do.”

Think-tank’s position

Sam Alvis, head of energy security and environment at the IPPR think-tank, suggested zonal pricing was not necessarily a bad idea, but that it might just not be the time for the government to adopt it.

He said: “It’s not the right idea for right now, and it remains to be seen whether it is the right idea for the UK. One of the interesting things about the other countries that have brought it in is twofold. Normally they have far fewer actors in the system. You look at Sweden, they have a large national control of their transmission, for example, rather than a load of independent operators and they have fewer people building generation, they have fewer demand side.

“So, the co-ordination challenge in the UK will be much higher. We need to know whether there are actually ways of handling that complexity.

“And the other is that we really don't have an answer for the politics yet in that other countries are either smaller or are more used to regional variation.

“In the UK, we are kind of allergic to this idea of a postcode lottery. That is a political challenge that is not insurmountable, but it does need leadership, it needs ideas because at the moment, the idea of how individual MPs or government would manage those variations is just not there.

“You've seen the examples in Norway, for example, backtracking or the recent fracture in Swedish politics where the prices were way out of whack in two regions, and that sort of thing is just a headache for government and can stall progress.”

A decision on zonal pricing is expected over the summer. There is no consensus on the issue, which is so much more complicated than a simple yes or no.