We're calling for energy market reform called zonal pricing to help cut your bills. The most thorough analysis says it’d save bill-payers at least £3.7 billion a year and cut system carbon emissions by 17%.
Lets get into the nuts and bolts: how, exactly, would it save that money? Would it create a postcode lottery? How would a zonal pricing system actually work compared to now? How would the government implement it?
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The spark notes: a 'one-pager' on the problem, how zonal is the solution and what it would mean for customers.
A deeper look at 'the problem': How we buy power now, the problem with the status quo, what we should do to fix it.
And the solution: How we'd buy power with zonal pricing, how energy costs change overall, how customers save on bills, how the government would implement it.
Learn more about:
Balancing market, Grid bottlenecks, Constraint payments, Inframarginal rents, Interconnectors and batteries, Contracts for Difference
Head to the Glossary.
Watch: how zonal pricing would save everyone's bills
In this video, we dispel the myth that customers in the South would pay more – but it's also perhaps the best explanation we can give for zonal pricing. Give it a watch in 5 minutes:
The spark notes
What's going on?
The government is considering moving Britain to zonal electricity pricing. Right now, we have national pricing, which means all energy producers sell their power for the same wholesale price, no matter if they're in Aberdeen or Devon. With zonal pricing, there would be a different wholesale price in each area.
It might sound like a postcode lottery with winners and losers. It's not: it's about making our whole system more efficient, saving a big pot of money to be shared out amongst everyone.
But would the South see bills go up? No.
With zonal pricing, everyone could save.
It's expected to save at least £3.7b a year – £55b by 2050 – and it'd be up to the government to choose how to distribute those savings, proportionally to reward areas with more renewables, or equally across everyone. They've already committed that no one's bills would go up with zonal pricing.
What’s so bad about the status quo, a national pricing system?
Right now, the way we buy energy is massively outdated: a system designed way back when Britain got its power from a handful of coal stations. Applying it to today’s energy – a diverse mix of small and big generators from cheap wind turbines to expensive gas stations – leads to ludicrous waste that costs you billions.
Here's how we buy energy now.
Step 1: Britain buys wholesale electricity “blind”, without considering whether the power can actually get to its users – and pays dearly for the fallout when it can't.
For each half-hour of the day, there's one national electricity price set by the most expensive producer in the mix. Here's a quick visual of the national price being set:
To keep that single price lower, we order the cheapest sources we can: meaning a lot of wind power from the North and Scotland.
Right before it’s due to be generated, we realise we can’t get that power down to the South without causing major traffic jams and blowing up the grid. Which brings us to...
Step 2: balancing. We fix our mistake by paying those same turbines to switch off and paying gas stations to switch on at inflated last-minute prices closer to users. Yup – we often pay three times for the same energy.
Here's how The Times wrote about wasted wind back in March '25
Ludicrously, we keep making this mistake over and over again. It's cost Britain over £418,000,000 in the first four months of 2025 alone.
You foot the bill, and generators profit.
How is zonal pricing better?
With zonal pricing, there'd be one electricity price for each 'zone' across the nation, set by the price of energy producers in the area. The wholesale price would be lower in areas with lots of cheap generation (in the North and Scotland), and a bit higher in crowded areas without much generation.
We'd pay slightly higher upfront wholesale costs overall, balanced out by even bigger overall system savings because we wouldn't have to do the 'cleanup' (switching wind turbines off and buying extra gas). Essentially, we pay in one transaction instead of three. Energy producers’ profit gets turned into savings on customers’ bills instead.
How would zonal pricing unlock £55 billion savings?
We commissioned an independent consultant, FTI, to model what a zonal pricing system with 12 zones would cost between 2030-2050. They worked out zonal pricing would save £55 billion overall (or around £3.7b a year). Here’s how:
- Wholesale electricity prices go up by £34.7 billion. Overall, wholesale costs would go up, because we’d be buying more from generators across the country who are more expensive at face value. BUT:
- Balancing costs go down by £40.2 billion. This is the 'tidy-up' savings I mentioned above: we don't have to pay to switch turbines off, or pay extra gas generators to switch on (technically these are called "constraints" costs).
- Certain energy producer profits shift to bill savings of £64.5 billion. Right now, low-cost producers get paid the same as the most expensive unit even though their power is cheap to make, and pocket the difference as profit (called "inframarginal rents"). Under zonal, when producers in one zone sold to a more expensive zone, the grid operator would take the difference and give the saving to customers (called "congestion rents") There's more to this: read it here.
- Wind turbine subsidies go up by £15 billion. Contracts for Difference (CfDs) are subsidies built into energy costs to encourage investors to build wind turbines, guaranteeing them a steady price for their energy, even if the wholesale price is lower. Now producers aren’t being paid like they’re expensive gas generators, CfDs would go up a bit to reach that agreed price.
How long would it take to implement a zonal pricing system?
We think it’d take 2 to 4 years, but others think it could be done in 18 months. Either way, it’s worth doing, because the costs of our current system are going up and up. We need decisive action from the government as quickly as possible.
That's the spark notes done.
You're now moving from mild to 'Thai spicy'.
Buckle up...
A deep dive into zonal pricing
Watch Greg get into the nuts and bolts:
We'll get into each point in more detail below.
How our national pricing system works (the 'status quo')
Great Britain currently uses “national pricing” in its wholesale electricity market. National pricing means there is just one electricity price covering the whole country. This is the price energy producers get paid for their power, whether they’re a gas power station in Land’s End or a wind turbine in John o' Groats. This price changes every half an hour.
This doesn’t mean customers’ energy rates are the same across the country right now.
Wholesale electricity costs only make up about a third of a typical bill. The other two thirds are made up various costs like maintaining the grid and transporting the energy around, some of which do vary regionally already. So Britain already has a postcode lottery – customers in northern Scotland pay £96 more per year than Londoners, in north Wales and Merseyside it's £120 more.
How we buy power in our national market
Step 1
We buy electricity on the wholesale market (without checking that it can actually reach its users)
The wholesale market is like an auction. All the energy producers in the country line up by price (this is called the “merit order”). Buyers order as much as they need, starting from the cheapest power (usually renewables) up to the most expensive. An hour before the energy is actually going to be used, the auction closes.
- We pay for ALL the power at the price of the most expensive unit ordered (i.e., usually meaning we pay for loads of cheap renewables as though they’re expensive gas.)
- Producers not ordered in the auction (the most expensive ones) are told not to switch on.
Here's a super quick visual of that in action:
There’s something important missing: we haven’t considered where the producers are in relation to the energy users.
Energy doesn’t just magically get from one place to another: it’s got to travel through miles and miles of wires first. And just like on real highways, there are parts of the grid that get congested and can’t handle as much power flowing through as we need. (More on grid bottlenecks later.)
But that’s probably nothing to worry about right?
Wrong.
Step 2: balancing
We pay a second time to switch those turbines off in the balancing market
An hour before the energy will be generated and sent down the wires, the National Energy System Operator (NESO) takes over to ‘balance’ it, i.e. check the power can actually get from A to B to keep the lights on.
What usually happens: OH NO, we’ve bought loads of wind power in Scotland when most of our energy users are down South. There’s no way we can get the power there without blowing up all the wires. So, what do we do?
We tell the wind turbines to switch off, but we still have to pay for the energy we ordered from them. Trouble is, if they don’t generate, they’ll miss out on an extra bit of profit (called “Contracts for Difference”). So they refuse to switch off unless we sweeten the deal. We pay up. Sometimes, they’ll get paid more to not generate than to generate.
We pay all of it. The wind gets wasted.
But now we’ve got bigger problems...
We needed that energy for our customers in the South. How do we keep the lights on?
Step 3: more balancing
We pay a third time to fire up gas generators to fill big gaps down South
Remember the gas generators we told not to generate back in the wholesale market because they were too expensive? Time to go crawling back. They're closer to customers and they can fire up in a hurry but they charge an inflated price because we asked so late.
We end up buying a huge portion of our energy needs this way, and it's only growing:
Source: National Energy System Operator, 2024. Scheduling and Dispatch Options webinar
In the first four months of 2025, Britain has spent £418,000,000 on last minute changes in the balancing market: £68 million telling wind farms to turn off and £326 million on firing up gas plants.
It’s ludicrously wasteful.
Zonal pricing helps fix it. We explain all this in more detail later.
Why is our system so very broken?
- Our energy is changing, but our markets haven’t caught up
The national market was designed before the first iPod, back when Shaggy was topping the charts. Since then, renewables have gone from 7% of the nation’s power source to 46% and we’ve banished coal altogether. Unlike coal, we can’t control when renewables generate – which means we need to manage them totally differently. The ‘front-end’ of the system has transformed, the back end is lagging behind.
- Gas sets the price of renewables 97% of the time – and producers profit
As we explained earlier, with a single national price, wind and solar farms typically get paid whatever the most expensive power plant in the mix is paid, and pocket the difference as profits. These profits are technically called “inframarginal rents”.
What’s good about this is that those producing the cheapest power get rewarded the most, encouraging more investment in renewable energy.
The idea with keeping national pricing is built around keeping profits for renewable producers as high as possible.
A wind farm near Inverness will come on and generate cheap, carbon-free power. It will be paid the same as a gas plant near Shoreham on the English Channel. Investors will see how much profit renewable energy makes and invest more in them. Eventually, this will cut bills by knocking expensive, volatile, often imported fossil fuels out of the mix of energy sources.
This sounds great in theory, in real life it isn’t going so smoothly.
And critically, customers are missing out on the rewards of having all this homegrown low-carbon power.
- Lots of wind generation is built far from customers, behind grid ‘traffic jams’
It's super important to balance supply and demand on the power system exactly at all times. Think of the power system as the water pipes in your home. If there’s too much water, the pipes are going to blow. If there isn’t enough water, good luck taking a shower! So let’s assume we’ve got the right amount of water, now what about the pipes?
Getting electricity from the generator to the customer requires wires. If there are not enough wires or capacity to transport the electricity from a wind farm to where it’s needed, you have a grid bottleneck. This is alternatively known as grid ‘congestion’. If there is too much electricity trying to go through that bottleneck, some will have to be switched off or “constrained”. Otherwise, the wires will overheat and things start going bang.
One of the other big problems we currently face is that most of our ‘water’ is in one place, whilst most of our ‘showers’ are in another, and the pipes simply aren’t big enough to get the right amount of water from A to B at the right time.
- There’s no incentive to build wind turbines where they’d be really useful
Because our national wholesale market buys power without considering where it is, wind generators profit even if their power never gets to users. It’s in their best interest to build where it’s windiest — often behind bottlenecks in remote areas.
Why would you build a wind farm somewhere it’ll just be switched off? Because the current rules mean you will still get paid for being switched off.
This means we now have very weird things going on in the system. Some huge Scottish wind farms built in the last few years (and subsidised by bill payers) only generate around a third of the time they should be — yet still get paid for the other two-thirds they don’t produce. Scotland's biggest offshore turbine got paid £65 million to switch off last year.
Some of these wind farms even compete with each other to get turned off first.
We think it's high time we rebalanced this system back in favour of consumers.
What do we need to fix?
For a big system upgrade from fossil fuels to mostly renewables, we need new, better rules to make sure things are working properly and in the best interest of the bill payer. We have three big arguments.
- We need to stop building turbines behind grid bottlenecks. Investors are basically building ‘money-making machines’ that make their profit by being paid to switch off most of the time, instead of being paid to power Britain. It’s wrong and unfair for people and businesses. We have to change the rules.
- We need to build new pylons and wires smartly. Upgrading power lines will help fix grid bottlenecks, but they’re eye-wateringly expensive. Since bill-payers foot the costs, we need to be as efficient in building the grid as possible by using more energy locally.
- We need to get the cheapness of renewable energy onto customers’ bills now, not in ten or fifteen years’ time. We have some of the highest electricity bills in the world - mostly due to the cost of gas - and we need to cut the cost of living. Customers deserve to see the benefit of welcoming renewable generation. We need a better balance between generator profits and customer bill savings.
Here's how zonal pricing helps fix our broken market.
How we’d buy power in a zonal market
Step 1: the wholesale market
We order electricity locally in smaller wholesale markets
To buy power, we’d still line all the producers up by price and order from cheapest to most expensive. This time, instead of one national auction, there’d be one for every zone. Each zone buys its electricity from its own producers.
There’d be a single price in each zone, based on the price of the most expensive unit.
That price would be lower in some areas, and higher in others – but even in areas with a higher wholesale cost, customers would see their bills go down.
Step 2: balancing
We use the balancing market for small tweaks only, saving billions
We wouldn’t spend millions every day correcting mistakes made in the wholesale market, switching wind turbines off and buying last minute gas. Costs would drop significantly because we’re paying for electricity once instead of three times.
How do energy costs change overall with zonal pricing?
We commissioned an independent consultant, FTI, to model what a zonal pricing system, with 12 zones, would cost between 2030-2050. Their findings?
Zonal pricing leads to at least £3.7 billion in cost savings per year from 2030 to 2050 - a total of at least £55 billion - compared to what we’re on track for.
It does this by tidying up the system that creates the final price, which involves some costs going up but others going down enough to provide an overall net saving for all through a much more efficient system. Let’s break it down.
1. Constraint costs go down by £40.2 billion.
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“Constraint costs” are what the grid pays to turn perfectly good wind farms off and overpay gas plants to turn on. These constraint costs have risen sharply: in 2017, they cost £170 million. This year, they’re on track to hit £1.8 billion.
Without reform, by 2030, they’ll at least double or even quadruple that up to £7.8 billion per year, depending on how quickly we build more infrastructure.
Under zonal pricing, constraint costs virtually disappear altogether. Generators are only paid for power they can physically deliver, fully accounting for grid bottlenecks. We pay for what we use, not what we could use.
2. “Inframarginal rents” go down, generating £64.5 billion in beneficial "congestion rents".
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Translation: some of the profits currently paid to generators turn into bill savings instead. Greg explains this in under a minute here.
Zonal pricing means we strike a better balance between generator profits and customers’ need for lower bills by turning some inframarginal rents into “congestion rents”.
Zonal wholesale markets mean those zones with lots of cheap, renewable energy will pay renewable prices more often (instead of having their price set by gas) and see the financial benefit reflected directly on their energy bills.
So how do ‘congestion rents’ work? If a wind farm has more power than locals in the zone need, it can send its power to another zone in need of cheaper electricity. To keep things fair, generators in Zone A will only ever sell power at Zone A prices, whilst consumers in Zone B can only ever buy power at Zone B prices, regardless of where that power is coming from or going to.
When the grid is running efficiently, each zone should be pretty much the same price. However, when the grid becomes overworked, two things happen:
- Zone A aims to offload its excess cheap renewable power locally.
- Zone B is willing to pay a bit extra to make up their local shortfall.
In this scenario, Zone A prices are now lower than Zone B prices and starts to send over some of their cheap power to help out.
Some sharp-eyed readers might ask what happens to the missing money - some of Zone A’s power is being sold at the lower price, whilst being bought by consumers in Zone B at the higher price. Under national pricing, this missing money would go to the generators in Zone A as profit. Under zonal pricing, this money goes instead to grid operators, directly reducing the system costs already on your bill used to fund grid upgrades, maintenance, and other super important things.
This transfers £64.5 billion worth of generator profits (“ inframarginal rents”) to consumers in the form of ‘congestion rents’.
3. Wholesale electricity prices go up by £34.7 billion.
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“Wholesale electricity prices” would go up, because we’d be buying more power close to users in the wholesale market – but the increase is outweighed by savings in system costs.
Right now, we usually end up buying that power anyway at an inflated price right before we need it: under zonal, we’re just moving that purchase into the wholesale market instead of the balancing market, reducing the cost.
Wholesale prices will also vary depending on where you live in the country under zonal: but this is completely by design. So:
What would happen to wholesale costs in each zone?
In zones with lots of renewables (common in North England and Scotland), most of their energy should be cheap clean sources, so the ‘most expensive’ unit should be a lot cheaper. Result: people in North Scotland won’t have the price of their clean local power set by a gas generator in John O’Groats. This power can be sold a lot cheaper much of the time, directly benefitting local consumers and businesses, helping to deliver economic growth to these areas.
In crowded areas with fewer generators (more common in the South), they’ll have less local renewables so they’ll have to buy more from gas generators. Their wholesale price may be higher than it is now. However - and here’s the super important part - currently we’re paying for these gas plants to turn on anyway, just not in the wholesale market - so the costs transfer from one area to another, and these customers can still save overall because of the various system cost savings.
It turns out cheaper for a number of reasons:
- Wholesale markets are much more competitive than the balancing market, so we often get the electricity for a lower price.
- We spend less money compensating generators for turning off (and not paying them to turn on in the first place).
- Flexible assets, such as batteries and interconnectors (the cables that link us to other countries) run more efficiently - working with the system, rather than against it. We drill down more into interconnectors and batteries here.
It's also good for the South because there’ll be a big incentive for companies to build renewable energy in those zones because they’d be able to sell their power for a higher price there (and as they built more, it would push the wholesale prices, and therefore bills, down over time!)
To sum up: zonal helps us buy the cheapest deliverable power whilst unlocking other efficiencies through competitive local wholesale markets, instead of hiding these costs elsewhere on your bill, resulting in £34.7 billion extra in wholesale costs by 2050.
4. Contracts for Difference go up by £15 billion.
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Contracts for Difference (or CfDs) are Government contracts designed to help fund renewable projects. They essentially guarantee the generator that they’ll be paid a certain price for their power no matter what the wholesale electricity price is. If the wholesale electricity price goes above this fixed price, the generator pays the difference back to bill payers. If the wholesale price goes below, the generator gets a top up.
Contracts for Difference are used all over the world as a way to encourage investment in new renewable generation by providing more stable long-term revenues.
Boiling it down: as CfD’s top up (or down) the wholesale price to a specified fixed price, the level of payments entirely depend on the underlying wholesale price. Let’s say a Scottish wind farm’s fixed CfD asking price (or ‘strike price’) is £70, and the average national wholesale price is £50. This means the average top up this wind farm receives is £20.
The reason CfD payments go up under a zonal pricing system is simple: most of our wind farms are located in the same place - in the north - and under zonal pricing, wholesale prices are on average much lower in the north.
So returning to our Scottish wind farm asking for a fixed price of £70. Under zonal pricing, its average local wholesale price has dropped to £30, meaning the average CfD top-up increases to £40. Ultimately these wind farms get exactly the same price for their delivered power (£70), so it doesn’t cost us any extra, it's just split differently between different parts of the market.
To recap: 2+2 equals the same as 1+3. In places where wholesale costs go down, CfD costs go up by £15 billion by 2050, but the overall cost of useful wind power stays the same.
More info on savings with grid interconnectors and batteries
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With zonal pricing, flexible or ‘two-way’ assets (things that can consume or supply electricity at different times) like interconnectors and batteries respond to effective local wholesale prices that fully consider grid bottlenecks and reflect the realities of local supply and demand, rather than blunt national prices that frequently tell them to do the wrong thing - think ‘square peg, round hole’.
Both of these are frequently paid to flow the ‘wrong way’ by the current system.
Batteries
Britain's main grid bottlenecks are in the north. Batteries, in theory, are perfectly positioned to help with this problem, charging when there’s too much power and discharging when there’s not enough - but this doesn’t quite happen under national pricing.
Up to two-thirds of paid last-minute tweaks by batteries in the north, supposed to help fix grid bottlenecks, instead simply undo bad instructions they already acted on from the wholesale market. The single national price simply doesn’t contain enough information to get them working properly in the first place. Rubbish in = rubbish out.
Interconnectors
It’s a similar story with interconnectors (the cables that link us to other countries). Interconnectors are super complicated, mainly because they connect two completely different countries and power systems, meaning anything we tweak on our end has to be agreed with the connected country too. But at the simplest level, they flow power from a country or area with a lower price to one with a higher price.
By 2030, these interconnectors could flow the ‘wrong way’ up to one-third of the time, importing power into the north when we need it least, whilst exporting power from the south when we need it most, driving up our electricity bills instead of making them cheaper. At these times, zonal pricing would make local power prices reflect local needs, meaning these interconnectors would only import or export when and where they actually need to.
Read the full FTI Consulting report here:
Impact of Zonal Market Design - FTI Consulting
Download
How would zonal pricing affect customers' bills?
Zonal pricing makes the system much more efficient, which unlocks a large pot of money. The government then gets to decide how to specifically allocate the savings.
They could choose to give areas with more renewables additional savings as reward, or could share the benefit equally between everyone:
There's more than enough to ensure everyone saves, and the government have committed that all areas would save with zonal pricing.
We've made a video digging into why the South would be no worse off with zonal pricing here:
How would the government implement zonal pricing?
We think this whole reform can be done in two to four years. Others have said we could go faster: Arup - a respected professional economic consultancy firm - said it could be done and dusted in 18 months. It could certainly be done by 2030.
The important thing now is the government makes a decision so everyone knows what the rules of the game are, which is impossible to know right now. Zonal pricing is the only option on the table it has properly explored, and the only one with robust, system-wide analysis that has had all its workings published to be scrutinised by anyone who wants to.
Rather than more delay, it’s time to get on with implementation and figuring out how best to spread the savings across bill payers in the fairest way possible.
If the government decides now, it can have a very successful renewable auction round this year because it has already promised old rules will still apply one last time (called ‘grandfathering’). This means lots of generators will try to get their projects into the round which favours generators far more than bill payers to make more money.
But the overall system savings from moving to zonal pricing are certain and necessary. The government has said something needs to change - things are getting too expensive the way it is. If we don’t get on with real reform now, we will be turning to the emergency brakes - overall worse for generators and bill payers - in a few years.
Conclusion
Our single nationwide zone made sense once when we had a few big coal power plants when we cranked the coal power plants up and down twice a day, but the energy system is becoming more complex to meet the needs of modern Britain with more renewable energy.
We need a system that allows the cheapness of renewable energy to finally be pulled through to bill payers, rather than continuing to promise it will in ten years’ time. More importantly, without proper locational signals in our system’s rules, we will build our system in a more inefficient way, making it more expensive than it could be.
Zonal pricing is the only option on the table for the reform we need right now. Reform is hard work, energy bills will keep rising.
Glossary
- Inframarginal rents: Profits earned by cheaper generators who get paid the higher price set by the marginal generator.
- Congestion rents: Savings returned to customers when electricity flows between zones with different prices.
- Balancing mechanism: NESO's real-time system for adjusting supply and demand, usually by paying generators to ramp up or down.
- Wholesale market: Where electricity is bought and sold in advance of use.
- Constraint costs: Expenses from switching off generators or paying others extra to manage grid bottlenecks.
- Marginal generator: The last generator needed to meet demand, which sets the price for all others.
- National pricing: A single electricity price for the entire country, regardless of location.
- Zonal pricing: Different wholesale electricity prices for different regions, based on local supply and demand.
- Locational marginal pricing: A name that describes all forms of location-based electricity pricing, including zonal, and ‘nodal’ pricing systems popular overseas (which have 1000s of pricing areas, rather than just the 12 or so we might have in Britain).
- Contracts for Difference (CfDs): Government-backed contracts that stabilise renewable energy revenues by guaranteeing a fixed price.
- Grandfathering: a form of short-term financial protection for existing generators affected by market changes outside of their control.
Navigation
×
The spark notes: a 'one-pager' on the problem, how zonal is the solution and what it would mean for customers.
A deeper look at 'the problem': How we buy power now, the problem with the status quo, what we should do to fix it.
And the solution: How we'd buy power with zonal pricing, how energy costs change overall, how customers save on bills, how the government would implement it.
Learn more about:
Balancing market, Grid bottlenecks, Constraint payments, Inframarginal rents, Interconnectors and batteries, Contracts for Difference
Head to the Glossary.
