Energy Security and Net-Zero Secretary Claire Coutinho has today (12 March) set out proposed measures to shift to zonal pricing – whereby electricity costs differ regionally.
She touted a £45-per-year saving from the average British household’s energy bills as a result of the changes, which will be consulted upon until 7 May.
“These proposed changes will pass on the benefits of cheaper power to people across the UK and help reduce bills,” Coutinho’s Department has stated.
Zonal pricing will see generators receiving different rates based on the distance between their generating assets and their consumer base. The smaller the distance, the lower the cost for consumers.
The Department for Energy Security and Net-Zero (DESNZ) is currently hiring a team leader for its locational electricity markets policy design programme to support the changes. The job advert for this role describes reforms of the UK’s electricity market as “a top priority across government”.
DESNZ is assessing both locational investment signals (incentivising developers to build new generation assets near energy users) and locational operational signals (incentivising the matching of supply and demand).
The Department is also asking experts how many zones the UK should be split into. The minimum would be two – north and south – but an option to have seven or more zones on the table.
“More zones may mean zones better reflect transmission constraints, therefore lowering the volume (and cost) of redispatch,” the consultation documents state. “However, a greater number of (smaller) zones could mean that wholesale market prices in individual zones may be more volatile and less predictable.”
Another factor the Department is considering is altering electricity pricing depending on the time of day, providing cheaper power at times of low demand and high supply and vice versa.
Cost of curtailment
Homes in the South East could stand to see a temporary spike in costs as demand in this region is highest and supply is lowest.
This could be rectified by additional solar or wind farms, with energy regulator Ofgem foreseeing a significant saving for customers across Britain from zonal pricing in the long-term, of up to £51bn within 15 years.
Much of the reduction in costs will result from a decreased need for infrastructure and for curtailment payments. Also known as constraint payments, curtailment payments are made by the Government to generators in order to get them to turn off their assets to stop them from overloading the grid at times of peak supply.
Official UK Government figures have shown that wind farms received £806m in curtailment costs across 2020 and 2021.
When these figures were first revealed in May 2023, Scotland’s First Minister Humza Yousaf wrote to the UK Government imploring Ministers to set out a more robust plan to scale both battery energy storage and long-duration energy storage as means to reduce curtailment.
National Grid estimates that the UK will need to host 20-25GW of energy storage capacity by 2035 if the Government is to achieve its electricity decarbonisation goals. For context, around 4GW was operational at the end of 2023.
Dash for gas
Rather than clarifying an updated plan for energy storage today, Coutinho has committed to support the construction of new gas-fired power stations.
A statement from DESNZ reads: “While the renewable share will increase in the years ahead, they aren’t failsafe, and future supply can only be calculated based on estimation. That is why flexible power generation is needed, to keep our electricity secure and reliable, acting as back-up generators to keep the lights on.”
The statement stipulates that developers of new gas power plants should be aware that they will run less frequently as the UK’s capacity to generate electricity from renewable and nuclear sources grows.
The UK is notably striving to host 50GW of offshore wind by 2030, 70GW of solar by 2035 and up to 24GW of nuclear by 2050.
Gas developers should also ensure that their plants are ‘net-zero ready’ and able to convert to other alternatives in the future, or operate carbon capture. The UK Government refers to this as ‘abatement’ and wants all unabated gas offline by 2035.
It is clear that the Government has been swayed away from energy storage and towards gas peaking as it seeks to promote a “more pragmatic” approach to the net-zero transition. The media release accompanying today’s news shows that Ministers have consulted with several organisations with a vested interest in continuing gas generation, including National Gas, Equinor and Energy Aspects.
“In a net-zero system in 2035, we will need to run gas 90% less often but we still need to maintain two-thirds of the current gas capacity to ensure our energy needs are met at all times,” the Government was told by Aurora Energy Research’s managing director for the UK & Ireland, Dan Monzani.