The UK Government has set out its plans for “a fairer, cheaper, more secure, and more efficient energy system” in its new reforms of the energy market.
The move, designed “to protect consumers and secure investment into clean energy”, has three key elements, which are part of a reformed national package.
Firstly, there is the strategic spatial energy plan – commissioned last year and due to be published next year by NESO following consultation – which will be “at the heart of the reforms to improve the efficiency of the electricity system, under the national pricing model.”
This plan will set out how to spread new energy projects across land and sea in Great Britain up to 2050, with the aim of development, cut grid connection waiting times, and helping to reduce costs.
Secondly, the UK Government will work with Ofgem on reviewing the Transmission Network Use of System charges to “provide stronger incentives for investors to build generation where it is needed, supporting a cheaper system for all.”
This will include changes to make existing charges “more predictable” for investors, as currently the charges vary year by year, which causes uncertainty during long-term projects and can drive up prices up.
Thirdly, the government plans to improve the efficiency of the power system with rewiring and upgrades to old infrastructure, such as the new Sea Link development. In addition, it will work with NESO on a consultation later this year on further reforms to reduce the need for constraint payments. As an example, NESO could be given “better access to smaller assets”, such as battery storage sites, to offer greater flexibility.
NESO are also currently working with the wider industry to explore further options to help reduce the need for constraint payments, as part of their Constraints Collaboration Project.
Energy Secretary Ed Miliband said:
“Building clean power at pace and scale is the only way to get Britain off the rollercoaster of fossil fuel markets and protect families and businesses for good.
“As we embark on this new era of clean electricity, a reformed system of national pricing is the best way to deliver an electricity system that is fairer, more affordable, and more secure, at less risk to vital investment in clean energy than other alternatives.
“Our package of reforms will protect consumers and secure investment as we drive to deliver our clean power mission through our Plan for Change.”
The news follows the £14.2bn investment in Sizewell C and in coast community clean energy schemes, with the UK Government also saying it will be “taking on more responsibility” for planning the system and determining where clean energy infrastructure is placed.
The UK Government’s policy decision means the retention of the existing wholesale electricity market structure, rather than adopting a zonal pricing model. Under a zonal pricing system, the country would have been divided into several zones, each with its own wholesale electricity price based on local supply and demand conditions.
In response to the decision to not introduce zonal pricing, Chris Matson, Partner at LCP Delta, commented:
“This decision provides long-awaited clarity on the future of the UK’s electricity market arrangements.
“Our analysis has shown that the impact on consumers and the energy system of this contentious policy always hinged on how it would impact investor confidence. With this decision, the zonal pricing debate can now be put to bed and industry can move forward with greater focus, investing the capital required to meet the UK’s ambitious decarbonisation targets.
“While an earlier commitment would have been preferable, today’s announcement significantly reduces investment risk and increases the likelihood of achieving the Clean Power 2030 ambition. Delivering CP2030 will require an unprecedented expansion of renewables and low carbon technologies. By maintaining a national pricing system, investors now have the clearer and more predictable price signals they need to accelerate this investment.
“Whilst proponents of zonal pricing pointed to the opportunity for lower energy costs in high renewable areas, our latest analysis shows that if the government had introduced zonal pricing, wholesale prices could have increased for 98% of demand in GB – with only the north of Scotland seeing a reduction.
“However, a core challenge remains to integrate high levels of renewable generation into a system which lacks the capacity to transmit power from areas of generation to areas of high demand. We look forward to working with policy makers on options to ensure that the energy transition delivers for all stakeholders.
“Constraint costs – which zonal pricing aimed to reduce – will continue to be a significant issue under the national pricing system. Our analysis shows that, even accounting for announced network upgrades, constraint costs could double from last year’s levels to reach £3.2bn per year by 2035. Further investment in network upgrades, demand-side flexibility, and storage will be crucial to bringing down these costs.”
Caroline Bragg, CEO of ADE: Demand, said:
“The Government needs to get a handle on the cost of living. But, by rejecting zonal reforms that align us with our peers, today’s decision risks higher costs. Piecemeal tweaks won’t deliver the lower bills for all that Ofgem itself says is possible. With grid costs potentially hitting £8bn by 2030, how does the status quo stop consumers footing the bill?
“Everyone knows the old system is dead. Government must now prove this won’t become a hollow victory, emboldening net zero opponents with decade-long tinkering and rising costs. Now the decision is made, ADE: Demand is ready to work with the Government on the substantial pricing reforms still needed to ensure net zero actually cuts everyone’s bills.”
“The current wholesale electricity system has faced criticism for creating market inefficiencies, as it often fails to reflect the true cost of delivering electricity to different regions across the country. DESNZ’s own research suggests zonal pricing could save £24 billion in grid upgrade costs and Australia, Sweden, Norway and Denmark are already using the zonal pricing method for their respective electricity markets.”
Trevor Hutchings, CEO of the Renewable Energy Association said:
“To get to an energy system that is fit for the future, we can’t rely on the policies of the past. Market reform is essential, but we know from our own membership that there are strong views on either side of the debate, and that any change can create winners and losers.”
“However, it is uncertainty that dents investor confidence and I am pleased we now have further clarity. Focus now must be on growing our clean power system and, critically, bringing down the cost of electricity so that consumers feel the benefits of net zero in their pockets.”
Nigel Pocklington, Good Energy chief executive officer, said:
“Zonal pricing was a threat to truly renewable tariffs and stability of investment in clean power so we’re pleased that the government has abandoned the idea. If it is committed to a fairer more affordable market then moving levies from electricity should be high on its agenda.
“Meanwhile a reform which would truly drive renewable investment would be fixing our broken certification system to force suppliers to evidence the amount of power they are actually buying and matching with customer demand in hourly intervals.”
