Article written by Tim Mooney
Zonal pricing would divide the UK energy market into geographical zones and adjust pricing based on regional demand and supply. While some believe this will lead to a more intelligently designed UK energy system, others think it risks spiking project costs.
Most recently, Ofgem chief executive Jonathan Brearley has joined the zonal pricing debate in support of the system, claiming on a renewable energy podcast that “we have come to the view that zonal pricing is the best way forward.”
He is not alone in his support of zonal pricing. By splitting the UK into at least six pricing zones, areas closer to renewable energy sources such as wind farms would pay cheaper rates than areas more reliant on fossil fuels. This would supposedly encourage the development of more renewable energy projects in a number of regions to support energy price reduction in that particular zone.
What’s more, high energy use organisations, such as technical manufacturers and data centres, will be encouraged to strategically locate themselves nearer to renewable energy plants, encouraging them to seek out renewable energy rather than defaulting to fossil fuels which will help the UK lower its industrial emissions.
Importantly, zonal pricing is expected to address the primary concern of balancing the UK’s energy system. A vast number of renewable energy projects situate themselves in the same locations which face issues of oversupply. The amount of renewable energy generated in these regions far exceeds demand and is more than the grid can take, leading to wasted energy. If renewable energy developers were encouraged to seek out alternative locations, they could bolster supply in regions where renewable supply is lacking.
On the other side of the debate, many industry leaders and financiers have expressed concerns that a radical overhaul of the UK energy system through zonal pricing would generate risk and drive up the cost of capital for renewable energy projects. Analysis suggests a zonal pricing system could increase the cost of capital by as much as three percentage points.
What’s more, there is some debate as to whether or not zonal pricing will actually redistribute renewable energy projects. Renewable energy developers have highlighted a number of factors beyond price that determine project locations, such as weather conditions, planning regulations, and grid connection. Particularly for offshore wind, in which the UK is one of the world’s biggest generators, these projects are unlikely to redistribute due to seabed licensing.
Finally, leaders from a range of industries have voiced concern that zonal pricing would punish long-established energy-intensive industries with higher electricity costs, weakening their position in a global market.
For zonal pricing to have an effective outcome, clear direction from the government giving developers certainty about the future is needed to lessen the risk surrounding energy projects, establish implementation pipelines, and help industries plan their energy future.
10 February 2025
10 February 2025
07 February 2025
