AN Octopus Energy boss has hit back at offshore wind firms that are urging the UK Government to rule out introducing zonal pricing.
Earlier this month, 17 Scottish offshore wind developers wrote to Keir Starmer and First Minister John Swinney to warn investment could be halted and projects left unviable by the “unmanageable risk” of zonal pricing proposals.
The UK Government is currently considering a plan to divide the UK into different pricing zones, which would see consumers face varying electricity costs.
The coalition of developers – which has been backed by industry trade body Scottish Renewables – has warned zonal pricing could lead to higher energy bills for both households and businesses.
But Octopus Energy’s director for regulation Rachel Fletcher told the Sunday National the arguments being made against zonal are “overblown”, adding the single wholesale price setup in the UK is “bonkers and broken”.
Octopus Energy has repeatedly argued in the past that Scottish people are “getting a raw deal” in the current UK energy market and could have the cheapest electricity in Europe if a switch was made to zonal pricing.
At the moment, Britain has one national energy price even though at any point in the day the cost of producing electricity differs radically around the country.
If an offshore wind farm in Scotland produces more electricity than the network can handle it is paid to turn off, or "constrained", and a gas-fired power plant in the south of England is paid to turn on.
The constraint costs – which are collected from consumers – are huge and in 2022/23 they amounted to £1.5 billion and are projected to rise to £3.7bn by 2030, something Octopus considers a “staggering waste of electricity”.
Fletcher (below) said the system is only going to become more wasteful as time goes on, and while she believes a zonal pricing system needs to be designed “carefully”, she said it makes logical sense to make the transition.
She told the Sunday National: “We’ve got an incredibly wasteful system that is only going to become more inefficient as we build out more renewables.
“Zonal pricing ultimately should be having some impact on where big industry sites would end up [too]. Scotland would be a cheap area because we’ve got multiple times more generation in Scotland than we have demand.
“That means typically the wholesale price in Scotland would be low, which would attract data centres, electrolysers, and other big industrials that make very heavy use of electricity. So instead of paying to export it down to the south to serve a data centre there, we know data centres on the back of this policy debate are increasingly looking to buy land between Edinburgh and Glasgow so they might be able to benefit from this new regime.”
Zonal pricing would split the UK up into several different geographical zones with each having a different price based on its level of supply and demand. Energy consumers would pay less for electricity if they were based close to electricity projects but more if they were based further away, meaning Scotland – with its abundance of renewables – could benefit enormously.
Fletcher insisted there is plenty of evidence internationally of zonal pricing markets being extremely successful in attracting renewable investment, so there is no reason to believe that can’t be replicated in the UK.
Countries such as Australia, Norway, Denmark and Sweden have all implemented zonal pricing and Octopus says the single wholesale price setup is slowly becoming the “exception not the rule”.
Octopus research has also shown three of Europe’s biggest wind developers hold 50% of their portfolio in locational energy markets.
Fletcher said: “The international evidence does not support the idea that zonal would be a disaster for renewable investment.
“It needs to be designed carefully, we would like to get the Government to interact more with investors and developers in the design of zonal and we would like more conversations about grandfathering and what that would look like.
“But it is untenable to say that zonal is incompatible with investment in renewables.”
The UK Government and Ofgem have also published reports that say there is no evidence locational pricing would disrupt renewable deployment.
The Department for Energy Security and Net Zero has previously said: “There is no evidence to suggest zonal markets harm investment in low-carbon generation compared to a uniform price market. Norway, Sweden, Italy and Denmark, have all had significant growth in renewables.”
Ofgem has also previously reported in its assessment of other jurisdictions that have transitioned to locational pricing, “we have not observed any material impact on generation investment”.
Scottish Renewables claimed analysis has found that even a modest increase in the costs of building renewable projects would negate any potential savings from zonal pricing, but Octopus has argued the cost of capital has not gone up due to the introduction of zonal pricing in other countries.
According to an International Energy Agency report the company cited, between 2008 to 2016, the cost of capital came down for all observed countries, regardless of whether they had regional or national wholesale electricity markets.
Sweden, which introduced zonal pricing in 2011, enjoyed a 38% relative drop in the cost of capital for wind energy between 2008 and 2016.
“Their [Scottish Renewables] arguments are way overblown,” said Fletcher.
She added: “Scottish consumers stand to benefit more than anybody else – the Scottish economy more than any other region of the country – and yet the renewable lobby is saying you need to protect our interests.”
Fletcher also said she did not buy claims zonal pricing would take seven years to implement, as she said the nodal pricing – a more complicated version of zonal – has been implemented internationally in less than four years.
“Given it’s been implemented elsewhere, the industry now knows what it is, it’s increasingly clear what needs to be done to make it happen, in our mind there’s no reason why it should take more than three years,” Fletcher said.
“It’s time to stop talking about it and start planning to make it happen.”
Claire Mack, chief executive of Scottish Renewables, said: “Zonal pricing would actively disincentivise the deployment of renewable energy in Scotland at a time we need it most, as well as making the UK market comparatively less attractive. If investors go elsewhere, it could mean Scottish projects are paused, or worse, abandoned.
“Exactly how existing operational projects and investments would be protected if zonal pricing is introduced remains unknown. However, the ‘grandfathering’ arrangements which the UK Government has so far confirmed would undoubtedly leave renewable energy projects in Scotland exposed to significant additional risk in a zonal market.
“While the renewable energy industry in Scotland has never said that zonal pricing is incompatible with investment, we have been clear that the inherently greater risks in a zonal market would make investment more expensive and more difficult. Ultimately, this means higher costs and less security for consumers.
“Zonal pricing risks leaving Scotland with the worst of both worlds by undermining future renewable energy projects while doing nothing to address the challenges that consumers face right now."
