© Supplied by National Grid The introduction of zonal pricing to the UK electricity market would create uncertainty and “undermine already fragile investor confidence”, according to a report.
The study by researchers at University of Aberdeen “strongly advises against” adopting zonal pricing and instead advocates for a range of national reforms.
The UK government is currently considering whether to introduce zonal, or locational, pricing as part of its ongoing review of electricity market arrangements (REMA).
Recent media reports suggest that the UK government is leaning away from zonal pricing, although a final decision has yet to be made.
The zonal pricing proposals have led to a contentious and at times heated debate within the UK energy sector, particularly among Scottish offshore wind developers.
Supporters such as Octopus Energy argue introducing zonal pricing will correct inefficiencies in the system and save consumers billions.
Meanwhile, the Energy Systems Catapult says zonal pricing is the “only option” that can efficiently integrate renewables onto the grid and “build the foundation for net zero”.
However, opponents including trade bodies RenewableUK and Scottish Renewables and developers like SSE and ScottishPower say zonal pricing will put billions of pounds of investment and jobs at risk.
Should zonal pricing be introduced in the UK?
Co-authored by University of Aberdeen professor John Underhill and independent energy analyst Matthew Porter, the report assessed whether zonal pricing aligns with the UK government’s energy and net zero objectives.
The report concluded that zonal pricing would create investment uncertainty and risk, “deterring vital private sector capital” which is “essential to meeting net zero targets”, the university said.
Introducing zonal pricing could lead to unpredictable revenues and costs, which would make raising both debt and equity capital more difficult and expensive.
These costs would ultimately be passed on to consumers, the report found.
The study found that “on balance” zonal pricing “does not provide an obviously better, cheaper or more secure system” due to the impact it could have on investment.
“Whilst the principle of having cheaper prices close to generation might be politically attractive in some regions, it will carry negative consequences for households who will receive higher bills with resultant political consequences in energy hungry areas expressed by loss of votes,” the report states.
Electricity market reform
Professor Underhill said the UK electricity grid has an “evolutionary history” of transitioning from “local to national and from coal to gas”.
“The UK now has a challenging objective: to rewire the country and deliver an expanded electricity grid fit for a renewable future,” Underhill said.
Porter said a changing mix of electricity generation types “will inevitably require fresh investment in infrastructure”.
“Ensuring an investment landscape attractive to this new capital will require stable and predictable forecasts of revenues and costs,” Porter added.
© Supplied by Shutterstock/DCT MedInstead of introducing zonal pricing, Underhill and Porter recommend a range of policy changes to support grid investment and renewable energy deployment.
Firstly, the report recommends market design changes including ensuring that interconnector management is more closely aligned to network constraints.
The report also recommends that the National Energy System Operator (NESO) have “visibility of and access to small-scale assets, to enable these assets to participate in grid stability and maintenance”. NESO should also have access to “state of charge information” for battery storage assets.
Secondly, the report calls for increased investment in grid infrastructure to ensure the UK does not see similar blackouts as those experienced in Spain and Portugal.
Transmission network charges
The final recommendation is for the UK government to retain the transmission network use of system (TNUoS) charges, but with changes.
TNUoS fees are charged to energy generators and are designed to recover the costs of building and maintaining the electricity transmission network.
© Supplied by CanvaHowever, they have been criticised for disproportionately impacting renewable energy projects in Scotland, making them less competitive against those in England and Wales.
Scottish Renewables estimates TNUoS charges can increase the cost of building an offshore wind farm in Scotland by 20% compared to elsewhere in the UK.
While Underhill and Porter recommended retaining TNUoS charges, they advocated for providing a mechanism to “fix this cost forecast at the point of financial investment decision”.
“Fixing either by reference to specific forecast or by a cap and floor mechanism that retains some element of cost flexibility, but only to the extent compatible with raising the third-party project finance,” the report stated.
