UK drops zonal plan but pledges transmission reform amid wind auction fears

The UK government has finally ruled out a mooted switch to a zonal pricing system for electricity after facing opposition from many leading developers of renewable energy, however it will press ahead with reform of the country’s much criticised system of transmission charges, known as TNUos.

In its announcement, the UK government said it will pursue its aim of putting “fairness and affordability” at the heart of its electricity market reforms, but will do so by reforming the existing national pricing system based on a single wholesale price rather than split the country into different pricing zones, depending on their proximity to where energy is generated.

The decision was immediately welcomed by developers and commentators, many of whom have warned that prolonged uncertainty about whether the government would go through with a radical switch to zonal pricing was casting a pall of uncertainty over the market and threatening to undermine interest in the UK’s next allocation round for renewable energy, AR7.

Following consultations which started in 2022, the UK government said it had concluded that “reforming the system while retaining a single national wholesale price is the right way to deliver a fair, affordable, secure, and efficient electricity system.

“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,” UK energy secretary Ed Miliband commented.

The reforms will lean on the promised publication of a new Strategic Spatial Energy Plan, that the government says will be at the heart of its attempt to improve the efficiency of the electricity system using a national pricing model.

Transmission charges

Importantly, the government is also pledging to carry out a major reform of the UK’s system of network transmission charges.

Under the current Transmission Network Use of System (TNUos) system the charges that energy generators pay to use the transmission network increase with distance.

Offshore developers, especially in Scotland, complain that the charges undermine their investments with an unpredictable and corrosive effect on returns.

Some developers have cast doubt on their intention to put forward offshore wind projects for Contracts for Difference without reforms to TNUos.

In one such example, Ocean Winds has blamed TNUos for a decision not to bid into AR7 with the 2GW Caledonia Offshore Wind Farm, located in the outer Moray Firth in Scotland.

Seabed rights for Caledonia were obtained as part of the ScotWind process run by Crown Estate Scotland in 2022.

The government said it will step up its work with UK market regulator Ofgem to review the charges “to provide stronger incentives for investors to build generation where it is needed".

The reforms will include changes to make existing charges more predictable for investors, acknowledging that currently the charges vary year by year, which causes uncertainty during long-term projects and can drive up prices as developers price in the risk of volatility, the government stated.

A Reformed National Pricing Delivery Plan is promised for later this year to set out the next steps for government to work with Ofgem, the National Energy System Operator (NESO) and industry to deliver the reforms.

"The government is publishing this decision now to provide certainty for investors ahead of the AR7 auction round," it stated.

It is also consultations with NESO ahead of planned reforms to help reduce the need for constraint payments. This could give NESO better access to smaller assets - such as battery storage sites – that can offer greater flexibility when balancing the grid.

The decision to drop zonal pricing was quickly welcomed by several industry leaders.

"This decision brings welcome clarity and enables us to get on with investing in and delivering critical clean energy infrastructure,” commented Martin Pibworth, CEO of SSE, a UK utility and wind developer.

“Zonal pricing would have added risk at a time when the UK needed to accelerate its clean power transition, making energy bills more expensive. This decision reaffirms the UK as a world-leading renewables market, enabling the efficient delivery of the homegrown energy the country needs.”

RWE's UK country chair manager Tom Glover, who has been one of the most vocal critics on proposals for zonal pricing said also welcomed the decision not to go ahead.

"The next renewables auction – AR7 – is a critical moment in meeting the 2030 Clean Power Mission. Today’s announcement reduces uncertainty and risk for developers ahead of the auction, enabling us to invest at the lowest cost for consumers," he agreed.

Glover said he was confident that reforming the national market as an alternative to zonal pricing "can deliver the desired efficiencies and is less disruptive during this critical period of extensive investment and change".

“We’re reassured that Government has listened, and now look forward to further information on what a reformed national market will look like," Glover said.

"We also welcome the commitment to review Transmission Network Use of System charges to provide stronger incentives for investors to build generation where it is needed.; as well as the intent to better harness the flexibility of battery storage to balance the grid’

The sentiment was shared among several commentators.

“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,” said Chris Matson, a partner at advisory firm LCP Delta who also urged the UK government to press ahead with reforms to TNUos.

“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,” he added.

In its statement on zonal pricing, the UK government also underlined its commitment to expand and upgrade grid infrastructure.

Many of the offshore wind farms that the UK is building — or hopes to see built — are located in waters off Scotland, many miles from the biggest centres of electricity consumption in southeastern, central and northwestern England.

NESO has stated that that up to £4bn ($5.4bn) in curtailment payments could be avoided by 2030 alone, if critical network upgrades are completed by then.