New analysis: Planned electricity grid upgrades wipe out zonal pricing ‘benefits’

Fresh analysis on the impact of splitting up the GB electricity market suggests previously published estimates of savings from the introduction of zonal pricing no longer apply once taking account of the latest grid plans.

LCP Delta has updated its assessment, originally carried out for the Department for Energy Security and Net Zero (DESNZ), on the impact of zonal pricing. The previous analysis had used outdated grid plans from 2022.

The refreshed analysis finds:

• Accounting for the ‘Beyond 2030’ network plans, along with fixing offshore wind locations based on seabed leasing, leads to a significant reduction in the modelled system benefits of moving to zonal pricing to £0-11bn over 2030-50. This is compared to the £5-15bn under 'NOA7 Refresh' plans from 2022.
• In the ‘No Redispatch Inefficiency’ scenario (where interconnectors can fully redispatch their flows under the current national pricing arrangement) that could be delivered by incremental reforms, the modelled system benefits of moving to zonal pricing are eliminated.
• Even with partial interconnector reform, where just 25% of interconnector capacity can be redispatched, the potential system benefits would reduce from £11bn to £3bn. This highlights the case for zonal is driven by constraint of the SC1 boundary in the south of England caused by interconnectors – not Scottish wind.
• The case for zonal pricing is very sensitive to investment impacts, with a £11bn potential benefit being wiped out by just a 0.6 percentage point increase in the cost of capital for low carbon generation. A single percentage point increase in the cost of capital under ‘Beyond 2030’ grid plans, would mean a move to zonal pricing would become a £8-£19bn cost to the system over 2030-50.

Chris Matson, Partner at LCP Delta commented: “Our latest study highlights that increased grid capacity and strategically locating assets reduces the potential benefits of moving to zonal pricing.

“LCP Delta’s previous analysis for DESNZ assessed the impacts of zonal pricing under now outdated network plans and had limited consideration of strategic infrastructure planning, such as the location of existing seabed leases.

“With DESNZ commissioning the NESO to provide recommendations on a plan for Clean Power 2030, it is logical that any additional plans to upgrade the network and strategic planning would reduce the potential system benefits further.”

Alistair Phillips-Davies, Chief Executive of SSE said: “The debate over zonal pricing has always been a distraction from what should be the real focus: building the electricity infrastructure we know we need to deliver clean power at pace.

“Ministers have been clear about the need for stability to boost economic growth. Zonal would deliver just the opposite, less certainty and less investment.

“That’s why it is opposed by major investors, renewable developers and manufacturing groups including MakeUK and Steel UK.

“It’s time to back the builders not the blockers of an accelerated clean power system.”