We need a laser focus on delivering clean power, not a postcode lottery for energy prices

The fiscal outlook in the UK may be gloomy, but there’s one beacon of light — we’re on the cusp of the greatest transformation since the Industrial Revolution as we rewire and rebuild our energy system to achieve clean power by 2030.

The benefits are economic, as much as they are environmental. If we’d had a clean power system by 2022, the UK would have spent £20 billion less on gas imports during the energy crisis. But it’s no easy task. We’re talking about post-war levels of infrastructure development and great feats of engineering: installing 110m high wind turbines hundreds of kilometres at sea, subsea cables bringing renewable power from the north of Scotland, and creating giant water batteries by blasting 12km tunnels through Highland hills.

However, this could all be in jeopardy if the Government deviates from the plan, by tearing up the current energy market structure and introducing a ‘zonal’ pricing system — essentially dividing the country into regions with their own varying, and unpredictable, electricity prices based on local supply and demand.

The flawed logic offered by the proponents of zonal pricing is that this would incentivise developers to build closer to end users and encourage consumers to move closer to electricity sources.

The energy department is consulting on this as part of the ‘Review of Electricity Market Arrangements’ kicked off under the previous government. A decision is expected this summer on whether to pursue ways to improve the current national pricing approach or to abandon it entirely in favour of zonal pricing. And make no doubt about it: the latter would be a political and economic disaster for three key reasons.

First, it would create a postcode lottery for billpayers. In countries where zonal pricing exists, some customers find themselves paying £200-£300 more than an equivalent household for energy based solely on where they live.

Second, zonal pricing would not address the fundamental realities of energy infrastructure. Large-scale wind and solar farms can’t be built in urban centres. And the idea that the vague prospect of cheaper energy would incentivise factories to relocate near wind farms has already been rubbished by the likes of Make UK and Steel UK. The opposition to the policy is broad and overwhelming. 55 companies recently sent a joint letter to the Government urging it to rule out zonal pricing, as did a separate group of 16 trade bodies representing a range of industries as well as six of the largest trade unions.

Finally, zonal pricing would increase the cost of achieving clean power by 2030 for everyone – despite being impossible to actually implement before 2032.

New analysis from economists at LCP Delta found that under a zonal pricing system in 2035, wholesale electricity prices would be higher in every part of the UK apart from the north of Scotland – where increased costs elsewhere on the bill and the loss of investment more generally would erode any benefits. This means 97% of wholesale electricity usage would cost more under the proposed reforms.

What’s more, the riskier an investment is perceived to be, the more expensive it is to finance. This is why energy infrastructure generators and key investors have warned the Government that zonal pricing would make investments more expensive and subsequently put the Government’s annual auction for low carbon and renewable infrastructure, where developers bid for a “Contract for Difference” to deliver these projects, in jeopardy. Put simply, developers either won’t bid, or will have to add a hefty risk premium to the price they bid at.

This ultimately means higher costs for consumers — previous analysis from LCP found that adding a single percentage point to the cost of capital would increase the cost of the energy transition by around £50bn.

And the spectre of zonal pricing is already being factored into investment decisions. For example, we recently had to cancel plans to build an extension to our onshore wind farm at Blairidh – and it was the risk premium we had to apply for zonal pricing that ultimately made the project uninvestable. And modelling by Frontier Economics concluded that zonal pricing would add up to £4bn of additional cost to the next offshore wind auction (AR7), due to take place in the summer.

We do need to evolve the current electricity pricing system to ensure it’s fit for a clean power future. But major changes are possible within the current national model that would deliver real benefits far sooner than 2032, without creating a postcode lottery.

Regrettably, we’ve all seen in recent years how ideological economic thought experiments can trash investor confidence, with long-term consequences that ultimately hit consumers’ pockets. The clean power prize is a golden economic opportunity for Britain that is achievable without this costly distraction – don’t blow it now.

An edited version of this article first appeared in the Daily Telegraph and can be viewed here.