New research claims that the benefits of zonal energy pricing have been overstated – and that it could even end up costing consumers billions of pounds.
As the UK Government prepares to take a decision on whether to introduce zonal pricing, the research from energy consultancy Afry highlights further uncertainty over the stated benefits of a zonal electricity market.
The analysis found the claimed energy bill savings from a move to zonal pricing are overestimated and are more likely to result in higher bills for consumers if investment is negatively impacted.
This has the potential to add a £9.6 billion cost to consumers, the report found.
The research was sponsored by RWE and six other energy developers and investors, including SSE and ScottishPower.
RWE’s UK country chair Tom Glover said: “This new analysis shows that the claimed energy bill savings from zonal pricing are very uncertain and could have been overstated.
“There is a potential risk that the change could increase costs of the energy system – this analysis suggests at a potential cost of £9.6 billion.
“We have long advocated for stronger locational signals, but zonal pricing is the wrong approach, risking a higher cost energy system, uncertainty for investors, and making it harder to achieve the government’s Clean Power and Growth Missions.
“We’d urge the Government to rule it out as soon as possible.”
Modelling showing cost savings from a zonal market produced by FTI for Octopus Energy was based on high network constraints being sustained and failed to take into account measures already underway to solve it, the report claimed.
This explains the marked difference in the modelled analysis done for Government, Ofgem and others.
The Afry analysis shows that using the NESO’s Future Energy Scenarios 2024 (FES 24) Holistic Transition (HT) Pathway and Beyond 2030 network plans (which the FTI analysis is based on) produces an artificially high benefit from zonal pricing, which does not reflect the latest, real-world delivery scenarios.
For its research, Afry replicated the scenario used by FTI, but made adaptions to reflect up-to-date, real-world outcomes, including taking a more realistic view of offshore wind deployment (reaching 71GW in 2035 rather than 89GW).
The analysis by Afry shows that the widely stated benefits from a move to a zonal market reduce from £25bn over 2030-50, down to £8.9bn.
If the uncertainty caused by zonal pricing negatively impacts investment by just one single percentage point, then zonal pricing in Great Britain would turn from an £8.9bn benefit into a £9.6bn cost, Afry said.