How zonal energy pricing works

Flexibility & smart energy Policy

Our CEO made headlines recently when he said Scotland could have the cheapest power in Europe if the UK moved to regional energy pricing.

It might sound too good to be true, so we wanted to explain exactly how Scotland, and the entire nation, could benefit from cheaper power with 'zonal pricing' (sometimes called locational or regional pricing).

Only got time for the gist?

Right now, the UK has a single, country-wide price for electricity. We think it should be replaced with a fairer system where electricity prices vary by area, to reflect what it costs to produce and supply the energy in that area. This would...
Make bills cheaper (or no worse off) in every area of the country
Save at least £2 billion in energy bills per year for customers
Give areas with plenty of renewable generation, like Scotland, some of the cheapest electricity in Europe
Encourage new businesses to move their operations to these areas, creating jobs and helping the economy

Zonal energy pricing explained as the price of fish

Why does the UK's energy pricing system need reform?

Right now, the energy industry sets a single price for electricity across the country, and it is far too high.

The root of the problem: setting one price for the whole country means we lose flexibility and compromise on efficiency when we need it. The energy system is a constant balancing act: matching supply (all sources of power from wind turbines to imported gas power) with demand (all our energy needs from factories to phone charging).

The grid is in charge of keeping the balance, and historically it’s done that by switching on more gas-powered stations when we need more energy, and turning them off when we need less. Read more in our intro to energy flexibility.

But pricing at the national level is leading to consumers across the country paying much more for their energy than they need to.

For example: when demand is high, the national electricity price gets higher as the grid asks more power stations to switch on at the eleventh hour.

At that exact time, there are often still parts of the country where strong winds mean wind power outmatches supply: a surplus. The turbines are often forced to switch off, entirely wasting their green power. Or send it to places like France, only to buy it back far more expensively from countries like Norway when we need it again.

Using or storing that surplus power locally would be far better (and cheaper). We could encourage people to do that by giving it to them at a much lower price, but only if the price could reflect the regional market instead of the national one.

Enter zonal pricing.

Rather than a single country-wide price, we think electricity prices should vary by area, to reflect what it costs to produce and supply the energy in that area.

So, if you live in an area where lots of wind or solar power is generated, your bills will be extra cheap. In fact, research done by Ofgem, the energy regulator, shows these customers would benefit from some of the lowest electricity prices in Europe, and most if not all other areas of the UK would get cheaper bills too.

According to our own research, here's how the UK would benefit from regional pricing:

Businesses using zonal pricing could make an unbelievable 99% reduction if they switched their energy use to the cheapest, greenest times across the day.
It'd cut bills for all UK consumers by making the most of green energy that would've gone to waste: unlocking £500-900 million in bill savings for everyone over the next 10 years.
Our domestic consumers would have saved up to £3.9bn in the past year if zonal pricing had been implemented.
Lastly, we'd make much better use of our local renewables. Switching it off when too many green electrons are being generated is costing us millions each year. In fact, just through wind power, we’d save enough green energy to power 460,000 households each year.

What would happen to electricity prices in the rest of the country if the UK had regional pricing?

If Scotland got the cheapest power in Europe, wouldn’t that mean other people’s bills would be much higher? No.

Regional pricing could bring bills down by hundreds in every region of Great Britain, with average households saving anywhere between £11 to £240 each year. In fact, switching to regional pricing could save us up to £53bn over the next 15 years.

People across the country, whether they live near a renewable power source or not, would benefit massively from this change because it’d make our system vastly more efficient.

We wouldn't need to spend millions of pounds to pay renewable generators not to generate, pay expensive and dirty gas to turn on, and export our renewable generation to our neighbours even when we need it, all whilst pushing prices up in the UK.

It’d make far better use of the renewables we have to: instead of paying turbines to stop spinning, zonal pricing could enable suppliers like us to create new tariffs and projects. Ones that would encourage customers to use more local power with rewards like cheap, or even free electricity.

Plus, people in areas with a lower population density pay much higher standing charges right now, so the cheaper power they would benefit from with zonal pricing would make their prices much fairer.

Lets bring in regional pricing now.

As our technology and energy sources get more and more complex, one-size-fits all pricing simply doesn’t cut it.

We must work together with government and industry leaders to create this new forward-thinking system. We’ve already seen exciting and decisive action from the new government to almost entirely remove fossil fuels from UK electricity production by 2030.

To make the most of this green power, boost the economy and give people cheaper bills, regional pricing must come next.

How zonal pricing could make bills cheaper