The fight for hearts and minds
In the final part of this special edition on locational pricing we look at the potential impact on both domestic and commercial customers
The discussion of zonal pricing in more mainstream media has unsurprisingly focused on the impact on consumers, both households and businesses.
Over the last half a year or so, there has been a growing chorus of complaints from trade associations and unions, which, alongside renewable developers, have written a series of open letters to energy secretary Ed Miliband to urge him against the adoption of zonal pricing.
The most recent of these, sent towards the end of March, warned that the mere deliberation of zonal pricing is “undermining the competitiveness of the UK’s industrial base”.
The most vocal supporter, Octopus Energy, has repeatedly made the case that zonal pricing would drastically reduce electricity prices in some parts of the country, especially in Scotland where they would go from the highest in Western Europe to the lowest. The retailer said industrial and commercial users could slash their energy costs by locating to these areas.
But giving evidence to the House of Lords Industry and Regulators Committee in February, Teodora Kaneva, head of smart infrastructure and systems at the trade association TechUK, said many data centres, the most frequently cited example of users that could take advantage of zonal pricing, would be unwilling to locate in Scotland.
She said most data centres need more than just cheap electricity: “They need latency, to be in proximity to the client and to service them in split seconds. The transfer of data needs to be very fast.”
Kaneva said there are also other considerations such as water supplies, fibre optic connections and access to skilled workers.
She acknowledged that those specialising in the training of some artificial intelligence models don’t require the same proximity to clients, and that in principle TechUK’s members “don’t hate the idea [of zonal pricing] and think this is where we should be going to”.
But all things considered, Kaneva said zonal pricing “would certainly not be something that will push us to go into any particular locations”.
Appearing alongside Kaneva was Frank Aaskov, director of energy and climate change policy at Make UK, who said many of their members are located in parts of the country that would see wholesale electricity prices rise: “We are going to be penalised with higher uncompetitive electricity prices for a decade while we wait for generation assets to be located in our zones.”
“While we recognise that it could be a more efficient system if we started from scratch, ultimately we will be penalised with higher prices while we wait,” he added. “We don’t have a blank piece of paper. We have existing demand users who are where they are, and existing generation assets located where they are."
He said a “mile-wide steel plant” is not going to move hundreds of miles across the country to access “slightly lower electricity prices” somewhere else.
“We don’t have a blank piece of paper. We have existing demand users who are where they are, and existing generation assets located where they are.”
Frank Aaskov, director of energy and climate change policy, Make UK
‘Some businesses will be substantially better off’
Speaking to Utility Week, Octopus Energy’s Rachel Fletcher suggested opposition to zonal pricing from industrial energy users may partly stem from the fact that they will soon be insulated from some of the benefits due to the introduction of the Network Charging Compensation (NCC) scheme, which will allow them to recoup 60% of their transmission, distribution and balancing charges via a levy on suppliers. Eligible companies will begin receiving their first compensation payments next month.
In the absence of this scheme, Fletcher claimed the cost of electricity would fall in all parts of the country because “even in areas that have higher wholesale prices under zonal, the fall in network costs offsets those increases”.
“If none of them were receiving subsidies, they would all be better off under zonal, and some of them would be substantially better off,” she said.
By adjusting how compensation is distributed between industrial energy users in different parts of the country, Fletcher said the government could ensure that none would be worse off under zonal pricing than they would be under national pricing, while reducing the overall cost of the NCC scheme.
“If you’re in the north of Scotland, your wholesale electricity price is going to fall under zonal and you won’t need any subsidy. And for those whose wholesale price will increase, the overall amount of subsidy required to keep them on a level playing field with where they were before will be lower than it is now,” she explained.
Octopus subsequently published analysis by FTI Consulting which concluded that, without the NCC scheme in place, zonal pricing would save energy-intensive industries between £5.8/MWh and £19/MWh in 2030, depending on the zone in which they were located. Those in the south of Scotland would see the largest savings, while those in the south of England would see the smallest.
Potential savings for an energy-intensive user without the NCC scheme in place, according to Octopus
With the NCC scheme in place in its current form, Octopus said the introduction of zonal pricing would mean energy-intensive industries would lose out on £80 million to £100 million of compensation – equating to around £7.7/MWh. As a result, companies in five out of the seven zones modelled by FTI would see a net increase in electricity costs, although those in Scotland would still see significant savings.
However, Octopus said that if just a quarter of the reduction in the cost of the NCC scheme was reallocated back to energy-intensive industries, the government could ensure that companies in “all regions are left no worse off under zonal pricing compared to national pricing in 2030, while still leaving around £60 million to £80 million per year of the saving to be shared as desired by policy makers”.
“Depending on policy preferences, there would also be an opportunity to reallocate funding differentially across zones, if this was required from the perspective of ensuring a ‘level playing field’ within GB,” Octopus added in a research note. “This should be considered with care, given the implications for the efficiency of the electricity system if it were to lead to additional demand siting in more congested zones.”
However, responding to Fletcher’s comments, Aaskov said the analysis produced by LCP Delta and Grant Thornton for REMA, did not find that “everyone will be better off” under zonal pricing, even absent of the effects of the NCC scheme: “It quite clearly shows that there will be some who will be worse off than in the counterfactual scenario of a reformed national pricing model.”
He said further compensating energy users in areas with higher wholesale prices would be “difficult to manage” and would inevitably leave some energy users falling “just on the wrong side” of any eligibility thresholds.
“Of course,” he added, “if the government decides to move forward with zonal pricing, we’ll work with the government to try to see how we can minimise any kind of disbenefit that we would receive”.
The recent letter to Ed Miliband suggests industrial energy users have still not been won over. “Crucially, the government has yet to provide a comprehensive impact assessment that demonstrates energy-intensive industries will benefit from zonal pricing — or at least avoid adverse effects on industrial electricity prices — thereby undermining the evidence base for its policy decisions,” it stated.
Indeed, several trade associations, including Steel UK, have joined forces with renewable developers to create the group Fairer Energy Future to actively campaign against zonal pricing.
“It quite clearly shows that there will be some who will be worse off than in the counterfactual scenario of a reformed national pricing model.”
LCP Delta and Grant Thornton analysis
Postcode lottery
As highlighted by participants in Utility Week’s debate, there has been relatively little detailed discussion of how domestic consumers would be affected and to what extent they would be shielded or exposed to zonal pricing.
Opponents have sought to drive home the message that zonal pricing would create an unfair “postcode lottery,” including Renewable UK which in April published a survey of 3,000 people in England and Wales. The polling conducted by Opinium Research found 58% of respondents opposed zonal pricing, while only 14% were supportive.
According to Renewable UK, the polling also found that 50% of respondents would not believe the government if it tried to argue that zonal pricing would lead to lower overall bills because the electricity system would be more efficient, whilst only 21% actually believed this claim to be true and 72% thought the government should have told voters about this issue before the last election, given its repercussions.
Proportion of people opposed to zonal pricing, according to Opinium Research
Proportion of people who think zonal pricing should have been a pre-election issue, according to Opinium Research
Deputy chief executive Jane Cooper said: “People in England and Wales are rightly worried that zonal pricing would create a postcode lottery in which they’ll be paying higher energy bills.
“As this polling shows, the lack of fairness which lies at the heart of zonal pricing really concerns people. It’s no surprise they see it as something the government should have outlined in its manifesto before considering bringing it forward."
It’s worth noting that the survey did not include residents in Scotland who would be most likely to benefit.
In making its case to the public, Octopus Energy, has – as alluded to by Renewable UK – frequently emphasised the eye-watering sums of money paid to some wind farms to switch off, along with the extremely low bills some consumers could see in the parts of the country where this is happening.
Regen's Johnny Gowdy told Utility Week he is concerned that zonal pricing is being mis-sold to both politicians and the public as a way to reward communities for hosting energy projects in their area. He said there is no guarantee that local consumers would gain access to cheap electricity, with the extremely low prices forecast in some parts of the country really being driven by network constraints.
While it’s true that areas like the north of Scotland, which is home to a disproportionately large number of renewable projects, “would do quite well” out of zonal pricing, Gowdy said “that’s a bit misleading because it’s actually about constraints”, in particular across the B4 transmission boundary between the north and south of Scotland.
He said regions such as South Wales would not see the same benefits from hosting renewables because the transmission network in the area is relatively unconstrained. Under some zonal models, South Wales actually “ends up in the same zone as London”.
“And when we talk to MPs,” Gowdy added, “often they confuse zonal pricing with local energy supply”. He said it is “only when you explain that zonal pricing isn’t really about local energy supply” that the reality of zonal pricing “dawns” on them.
He said he has likewise spoken to lots of people from community energy groups “who haven’t even registered that zonal will impact on them because they’re assuming that this is something to do with the transmission network, or they’re assuming it’s some sort of local pricing and that might be a good thing, and they haven’t realised this will impact on the distribution network”.
“When we talk to MPs often they confuse zonal pricing with local energy supply.”
Johnny Gowdy, director, Regen
Political risk being underestimated
Gowdy said people's understanding of what zonal pricing entails remains “very, very low” outside of the industry parties that have been involved in the discussion over the last three years.
He said the two consultations that have been held as part of the Review of the Electricity Market Arrangements have “not really set out what it is the government intends to do but have just asked generation questions about options and preferences”.
Gowdy suggested there is even a lack of sufficient understanding at the highest levels of government: “I don’t think the ultimate decision makers – ministers, Chris Stark, the Treasury, for example – have really gotten into this yet.”
He said a “heated debate” may have been raging on within the energy industry for a while: “But I’ve no idea how much the ministers are even registering this at the moment. And when we’ve talked to some of their advisors, they’re saying at the moment they’re just focused on other things.”
Gowdy worries that the “political risk” of zonal pricing is being underestimated. He fears that decision makers will approve zonal pricing to show that the government is “doing something radical” and gain some “momentary relief” because it will “get Greg Jackson off people’s back”.
But he believes public support will soon evaporate as “people get into the detail of it; people understand the impacts; the price differences between different zones; how those prices will affect different consumers in different ways; the unseen value transfer from consumers that are paying high levels of subsidies to support generation in zones where consumers could be enjoying low levels of price.”
Rachel Fletcher disputed Gowdy’s characterisation of supporters' claims, saying: “We have never said that this is about local energy. This is about reflecting the supply demand balances behind network constraints. You should be setting the zones depending upon where the enduring constraints are expected to be.”
She also pushed back against his suggestion that the political implications of zonal pricing have not been given enough consideration, pointing out that “every time somebody mentions the phrase ‘postcode lottery’ they are flagging that up”.
On this point, Fletcher noted that Citizens Advice, the statutory consumer advocate within the energy industry, has said concerns over the distributive impacts are “not a reason not to support zonal pricing.”
Fletcher said the starting assumption is that benefits of zonal pricing will “fall with gravity” but, as with industrial consumers, “the government can decide to spread them however it wishes”.
“There is more than enough consumer benefit here to allow all industrials, all household consumers, all businesses in every single part of the country to have lower prices. And that is certainly what we would be advocating for,” she concluded.
