Skip to main contentThe UK Government has dropped proposals to introduce a zonal electricity pricing model as part of its Review of Electricity Market Arrangements (REMA).
Energy and Net Zero Secretary Ed Miliband has signalled a move away from regional pricing in favour of a reformed national pricing model, suggesting a shift in direction from previously signalled reforms.
What is Zonal Electricity Pricing?
Zonal pricing, also known as locational marginal pricing, would have divided the UK into different regions, each with its own electricity price based on local supply and demand dynamics. This approach is designed to reflect the true cost of delivering electricity to specific areas, accounting for factors such as generation availability, transmission constraints, and consumption patterns.
Supporters of zonal pricing have argued that it could promote more efficient use of the electricity grid and encourage investment in regions with high demand or limited supply. By aligning price signals with local conditions, the model aims to support a more resilient and balanced energy system.
Industry Reactions and the Case for Zonal Pricing
The proposal has sparked intense debate across the energy sector. Advocates, including Octopus Energy chief executive Greg Jackson, have claimed that zonal pricing could significantly reduce the cost of modernising the grid. A report commissioned by the company estimated savings of £27 billion, arguing that the model would encourage demand to shift from high-cost, low-supply areas such as the South East of England to regions like Scotland and the North of England, where renewable generation is abundant but demand is lower.
It was also suggested that more regionally-reflective pricing could reduce constraint payments to renewable generators, lower household bills in some parts of the country, and attract energy-intensive industries, including data centres, to areas offering some of the lowest electricity prices in Europe.
Concerns About Fragmentation and Investor Risk
However, the plans have also drawn fierce criticism. Opponents have warned that replacing the current national pricing structure with a regional model would lead to a fragmented system and create a ‘postcode lottery’ in energy bills. Alistair Phillips-Davies, the outgoing chief executive of SSE, described zonal pricing as a “huge mistake” and warned it could raise household bills by £200 to £300 for consumers in some areas. Others have raised concerns about the impact on investor confidence, particularly for new low-carbon projects.
The UK Energy Research Centre recently reported that the uncertainty created by a zonal model could add as much as £20 per megawatt-hour to the cost of new wind farms under the next round of government Contracts for Difference (CfD) auctions, as developers would be forced to factor in increased risk.
A Shift in Direction for the UK Electricity Market
The government’s decision to pursue reforms within the existing national pricing framework marks a significant moment in the evolution of the UK electricity market. While zonal pricing has been shelved for now, the wider challenge of balancing affordability, investment and decarbonisation continues to shape the future of UK energy policy.
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