Why zonal pricing may make it harder for you to support small scale renewables
In potentially a matter of weeks, the UK government is expected to make a monumental decision on the future design of the electricity market. A decision that will have major implications for customers, renewable generators and the country’s clean power goals. In this article, we explain some key risks of zonal pricing that you might not know about, as well as our thoughts on electricity market reform.
What is zonal pricing, and what’s our view on it?
REMA, otherwise known as the Review of Electricity Market Arrangements, is a major government review into our electricity markets. The reforms under consideration are technical and complex, with an overarching goal to help deliver a decarbonised and cost-efficient electricity system.
The government is wrestling with a big question: whether to radically shake up the electricity market and introduce a zonal pricing system – having separate geographical pricing zones across the country, or retain an ‘enhanced’ national pricing system.
The debate within the industry has been noisy and divisive, with larger organisations dominating the conversation. This is a problem, as it means the perspectives of organisations who offer a vital route to market for small-scale renewables, are not being equally heard.
Good Energy has a unique view here. We buy all of the power we supply customers directly from renewables across the country - which is not the case for the backers of zonal pricing. And it is from this perspective that we have significant concerns about the prospect of a zonal pricing system.
What are the risks of a zonal pricing system?
Splitting our national pricing market into separate zones risks introducing a postcode lottery for energy bills, an investment hiatus for renewable projects and the introduction of substantial amounts of complexity, delay and disruption at a key moment in the transition to a clean power energy system.
But there are other key considerations which are not getting the same level of attention. And we think it is important they do.
Zonal pricing will make it harder for customers to choose a genuine 100% renewable tariff
If approved, the final design of a zonal system will take many months to be confirmed. However, the latest indications point to a reduced role for suppliers to contract directly with renewable generators.
In terms of what this actually means, suppliers like Good Energy, who contract directly with renewable generators right across the country through our Power Purchase Agreements, may be limited to contracting directly with generators within zones.
This could create a situation whereby consumers in certain areas of the country are locked out from accessing 100% PPA backed renewable tariffs, due to the fact that there is not a sufficient amount of renewable generation to meet overall customer demand in the zone they are located in.
This would be a devastating outcome for consumers who are currently making an active choice to support the growth of small-scale independent renewable generators, irrespective of where they are located in the country.
Zonal pricing will likely stall investment in clean energy, including small-scale renewables
Breaking up our national electricity market brings significant change, disruption and risk. Investment in renewables hinges on stability.
The risks to investment are also equally applicable to smaller-scale renewable generators. The routes to market, such as those offered by Good Energy through our power purchase agreements, may be under threat if the design of a zonal pricing system aims to reduce the ability for suppliers to contract directly with renewable generators.
This would be harmful for all kinds of small-scale renewable generators, including community energy schemes who are typical of the kinds of generators we buy power from and who have social as well as environmental benefits.
It is worth remembering what’s at stake here. The National Energy System Operator has shone a light on the important role for small-scale generation as part of the net zero transition. By 2040, distributed generation could meet an impressive 45% demand at winter peak.
With implementation unlikely till the early 2030s, and many of the key design details such as how many zones the country will be divided into yet to be confirmed, this uncertainty presents serious threats to the investability of the sector, for both large and small generators.
The electricity market does need reform though
We can reform the electricity market to better support consumers and renewable generators, without bringing unnecessary risks and costs to bill payers. Here’s how:
- Introduce a requirement for energy suppliers to evidence the amount of renewable energy they supply based on energy they have procured, not simply certificates: doing so would deliver increased support for decentralised renewable energy resources, and increased system efficiency as suppliers would be incentivised to optimise their renewable procurement strategies based not only on how much their customers are using, but also when they are using it.
- Require energy suppliers to provide a more direct link between renewable energy supply and demand: time-based matching (i.e. matching customer demand to renewable generation, 24/7, 365 days a year) can send effective investment and operational signals for suppliers to procure a diverse mix of renewable technologies, and in the right location. Not only this, but you also get the key benefit of increasing transparency for consumers.
- Reform network charging arrangements: we don’t need to divide the country into separate pricing zones to encourage developers to build renewables in areas with grid capacity. Instead, we can reform existing network charging arrangements to deliver strengthened locational investment signals. We should also reform how network charges can deliver improved operational signals to consumers to support with flexibility, as well as options to move the costs away from being levied on the standing charge, as they are currently.
- Scale up demand-side flexibility: whilst REMA is principally focused on the supply side, we must not sideline the demand side. An efficient, renewable powered electricity system requires a significant increase in low-carbon flexibility. We need to join up separate industry workstreams and prioritise encouraging the right incentives for large-scale participation in demand side flexibility.
- Remove levies on electricity bills: REMA is focused on reforms to wholesale energy markets. However, social and environmental levies continue to sit disproportionately on electricity bills versus gas, proving a major barrier to wider electrification. We should move policy costs off bills into general taxation to lower everyone’s bills.
It’s clear that we need a significant overhaul of electricity markets. This is necessary to accelerate the greening of our grid, and we should be aiming to make energy fairer in the process. If we were starting from scratch, zonal pricing may be a good option. But coming from the reality of working with renewables up and down the country, we think that the risks are too great.
