Comment by Tom Luff, Practice Manager (Electricity Markets & Policy) at Energy Systems Catapult.

The government has a bold ambition to make Britain a clean energy superpower and at the centre of its plan is a clean electricity system by 2030. Zonal pricing is the only option currently on the table that can efficiently integrate renewables onto the grid, to build the foundation for Net Zero.

A commentator in 2030 might look back and see autumn 2024 as an inflection point:

The grid is at breaking point because it can’t get power to where it’s needed. The heroic deployment of offshore wind has been scuppered by planning battles over new overhead lines. The papers are full of stories of wind farms being paid to turn off (“£3 billion per year”), while gas remains necessary to provide back-up power where renewables can’t reach, and across the UK consumers are rejecting electric vehicles and heat pumps because of ever increasing electricity costs.

We have not reached this inflection point yet – the decision over the future of electricity market design – but this could be what’s ahead if we ignore the pressing system challenges we face.

The role of flexibility

There is no doubt that we need to build lots more wind and solar assets, while increasing the capacity of the power system to deliver electricity from where it’s made (e.g. north of Scotland) to where it’s used (e.g. the south of England). But that’s not enough. We need to bridge the gap between when clean power is produced and when it is used. There’s only one way to do that: clean flexibility.

The UK has some of the world’s most exciting, innovative companies ready to provide that flexibility. The likes of Electron, equiwatt, Evergreen, Sunamp and Voltempo are itching to create the secure, low cost, digitalised energy system we need. But they need real price signals to maximise the potential of their technologies.

Markets and planning – complements, not substitutes

Central planning is not a panacea either. Of course, planning is important for the transition to Net Zero. The concept of a Strategic Spatial Energy Plan emerged from our work for the Electricity Networks Commissioner. But a plan is only ever as good as the information it’s based on. Currently, our electricity market is producing bad data.

Our existing electricity system suppresses the value of demand-side flexibility and storage by having a single national price in the wholesale market that does not reflect local constraints, and by dispersing the value of balancing actions across multiple sub-markets. Periods with lots of wind should signal cheaper electricity prices for consumers to charge their electric vehicles, for instance, but currently the opposite often happens. A plan based on current market data will under-estimate the potential for flexibility and innovation to help us meet our decarbonisation aims quickly and affordably.

The solution: zonal pricing, now

To tap into the potential of flexibility and ensure planning is efficient, we need an electricity market that reveals value at the most granular level. Of the options on the table, this can only be achieved through a zonal market. It should be designed with a high number of zones, avoiding the need to reconfigure the market frequently. Greater temporal granularity would complement and enhance the benefits of zonal pricing – we recommend a move to settlement periods of five minutes (or less).

These granular price signals should be passed on in full to energy retailers (or other consumer-serving intermediaries) – as this creates the strongest conditions for a better alignment of demand with the fluctuations of intermittent renewable energy supply. This is the approach taken in other zonal markets such as Australia and Denmark.

Good policymaking must treat investors fairly. Protections for existing projects have been used as part of previous reform packages and will be needed for any major REMA option. A staggered transition to the new investment reality will give investors time to learn and adapt, allowing market players to thrive. We will shortly publish our recommendations for the investor protections needed in a transition to zonal pricing.

The UK has been a leader in energy policy – our invention of Contracts for Difference for investment in renewables, and the approach to regulating energy networks have been copied by jurisdictions the world over. But on electricity market design we’re well behind the cutting edge; this means we can have a running start in implementing zonal pricing and learn from what works elsewhere.

The 2030 clean power target is a towering mission. As with any tower, the first step is to get the foundations right. Zonal pricing has a successful track record of being implemented smoothly, supporting investment in both renewables and flexibility, and driving down costs for consumers.