The UK’s energy sector is bracing for a potential storm as new modelling from the UK Energy Research Centre (UKERC) sheds light on the complexities of implementing zonal pricing. The findings, which highlight the risks and uncertainties associated with this pricing mechanism, are set to spark intense debate and could significantly shape the sector’s development.
At the heart of the matter is the potential increase in strike prices for upcoming Contracts for Difference (CfD) auctions. UKERC’s modelling suggests that zonal pricing could drive these prices up by as much as £20/MWh. This increase is attributed to investors factoring in the additional volume risk stemming from exposure to transmission capacity uncertainty. In plain terms, investors are wary of the potential fluctuations in power prices due to constraints in the transmission network, and they’re demanding a higher price to compensate for this risk.
The implications of this are substantial. Elevated strike prices could translate to an annual increase of up to £3bn in consumer costs, effectively offsetting the financial benefits that zonal pricing aims to deliver. This is a significant concern, given the government’s commitment to keeping energy bills affordable.
However, the story doesn’t end there. UKERC’s modelling also indicates that these risks should decrease over time as transmission infrastructure develops. This suggests that zonal pricing would be more effective if introduced after resolving key transmission uncertainties. In other words, the UK might be putting the cart before the horse by rushing into zonal pricing.
The potential impacts don’t stop at consumer costs. Zonal pricing, when combined with transmission constraints, could also reduce generation investment in constrained regions. This could hinder the UK’s progress towards its 2030 clean power mission, a goal that Professor Rob Gross, Director of UKERC, describes as “an exceptionally bold endeavour.”
Gross doesn’t mince his words when discussing the challenges ahead. “The key question is not whether zonal pricing has benefits, but whether the time to introduce it is now,” he states. He emphasises the need for coordinated action across government and industry to mobilise investment in generation assets and transmission capacity. However, he also highlights the substantial risks for market participants if the government proceeds with zonal pricing at this juncture. “There is no straightforward plan B,” he warns.
The modelling from UKERC serves as a stark reminder of the complexities involved in energy market reforms. It challenges the notion that zonal pricing is a panacea for the UK’s energy challenges and calls for a more nuanced approach. As the sector grapples with these findings, one thing is clear: the path to a clean, affordable, and secure energy future is far from straightforward. The debate is far from over, and the stakes have never been higher.
