REMA: UK government rejects zonal pricingREMA: UK government rejects zonal pricing

The UK government has today (10 July) released its Review of Electricity Market Arrangements (REMA), declaring that it will not introduce zonal electricity pricing in the UK.

In the foreword to the REMA publication, secretary of state for energy security and net zero, Ed Miliband, stated that the government has “decided to retain a single national GB-wide wholesale market and introduce an ambitious package of reform to improve the efficiency of our future power system”, adding that the government plans to “create a more coordinated and strategically planned electricity system”.

The theoretical zonal pricing proposals would have seen the UK divided into segments, with electricity costs dictated by local generation and demand. This REMA document has been under consultation since 2022, and in that time, numerous industry stakeholders have weighed in to offer their opinions – both positive and negative – on the prospect of zonal pricing. Prominent supporters of zonal pricing included Ofgem CEO Jonathan Brearley and the UK’s biggest energy supplier Octopus Energy, while 11 major energy industry trade groups penned an open letter criticising zonal pricing proposals; signatories of the letter included wind energy trade body RenewableUK and solar trade association Solar Energy UK.

The REMA document states that the government has carefully considered the case for zonal pricing, but has discounted it as a possibility as “there are significant risks to zonal pricing that we have not been convinced can be satisfactorily addressed compared to our preferred approach of reforms to national pricing”. These risks have been identified as the uncertainty that investors would face when trying to invest in assets with fluctuating locational prices, distributional challenges and the significantly long timeframe it would take to introduce zonal pricing.

Rather than introducing zonal pricing, the UK government has instead opted to “implement an ambitious approach to reformed national pricing” and what it calls “a cohesive package of reforms to improve the effectiveness of our national pricing model”. The document released today notes that the full analysis of the UK electricity network will be published later this year, alongside a Reformed National Pricing Delivery Plan which will set out the next steps on the design and delivery of reforms.

The new reforms will see efforts made to cut transitional constraints on the network through the buildout of new transmission infrastructure in line with the Strategic Spatial Energy Plan (SSEP) and Centralised Strategic Network Plan (CSNP), as well as working to ensure new energy generation assets are sited in such a way to reduce grid strain and thus lower costs.

Reforms are also set to be made to Transmission Network Use of System (TNUoS) charges – the annual charges used to recover the costs of maintaining and operating the transmission network. Investors have noted that these TNUoS costs are too volatile year-on-year, and this volatility leads to higher costs for consumers as power generators price uncertainty into their strike price bids. The REMA document states that the government will work with the energy regulator Ofgem to deliver these reforms, noting that it will deliver them by 2029 at the very latest.

Rejecting zonal proves controversial

Industry stakeholders have been extremely and immediately vocal on their opinions on the decision to reject proposals for zonal pricing.

A number of key sector figures have said that the proposed more subtle changes will help provide certainty, including Ross Driver, fund manager of Foresight Solar, who said: “We need evolution, not revolution, to support the renewable energy build-out and future-proof our electricity network”, adding: “Achieving net-zero is challenging enough without shifting the goalposts”.

Others in the industry have expressed dismay and argued that zonal pricing could have been a major step towards lower energy costs and better network stability, including Caroline Bragg, CEO of the Association for Decentralised Energy (ADE), who said: “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.”