UK Government Rejects Zonal Electricity Pricing in Favour of National Market Reforms
On 10 July, the UK government released its long-awaited Review of Electricity Market Arrangements (REMA), confirming that it will not be introducing zonal electricity pricing in Great Britain. Instead, it will maintain a single, national wholesale electricity market and implement a suite of ambitious reforms aimed at improving the efficiency and coordination of the country’s future power system.
“We have decided to retain a single national GB-wide wholesale market and introduce an ambitious package of reform to improve the efficiency of our future power system.” – Ed Miliband, Secretary of State for Energy Security and Net Zero
What Was Zonal Pricing?
Zonal pricing would have divided the UK electricity market into geographic segments, with prices varying depending on local supply and demand dynamics. While theoretically offering more efficient price signals and encouraging local generation where it’s needed most, the approach raised significant concerns across the energy industry.
Since the REMA consultation began in 2022, the proposal has sparked a robust national debate, with energy regulators, suppliers, and trade bodies weighing in. Supporters included Ofgem CEO Jonathan Brearley and Octopus Energy, the UK’s largest electricity supplier. However, critics—including 11 leading trade associations such as RenewableUK and Solar Energy UK—warned that zonal pricing could introduce uncertainty and deter investment.
Winners and Losers: Who Gains, Who Misses Out?
The decision to retain a national pricing model and reject zonal electricity pricing creates a mixed bag of outcomes for different stakeholders across the energy landscape.
Winners
- Large-scale generators in remote regions: Under zonal pricing, generators located far from demand centres—especially in Scotland—may have faced lower revenues due to local oversupply and limited demand. The retention of a national pricing model protects these players from locational price drops.
- Investors and developers: The government’s choice offers greater predictability and regulatory stability, helping to de-risk long-term infrastructure projects. As Ross Driver of Foresight Solar noted, the clarity helps maintain investor confidence in a sector already navigating complex challenges.
- Established transmission operators: With a focus on national infrastructure buildout, companies responsible for transmission development (e.g., National Grid ESO) will play a central role in delivering upgrades aligned with the SSEP and CSNP.
- Consumers in high-cost regions: A national pricing model helps equalise electricity prices across the UK, shielding consumers in more remote or less energy-efficient areas from potentially higher zonal costs.
Losers
- Zonal pricing advocates: Organisations like Octopus Energy and Ofgem, who argued that locational pricing could reduce system costs and improve efficiency, may view the decision as a missed opportunity to modernise the market.
- Decentralised energy producers: Smaller, more flexible energy assets—often located close to demand—could have benefited under a zonal system that rewarded local generation. These players may now see fewer financial advantages under the current national pricing model.
- Consumers in generation-rich areas: Without zonal pricing, areas that host abundant wind or solar generation—such as parts of the North of England or coastal Scotland—may not see the lower electricity prices that a location-based system could have delivered.
- Grid flexibility advocates: Some believe zonal pricing would have sent clearer price signals to encourage demand-side flexibility and smarter grid use. Without it, they argue, the UK risks missing out on innovation and savings achieved in other markets with locational pricing systems.
Why the Government Rejected Zonal Pricing
The REMA report concludes that zonal pricing presents “significant risks” that cannot be adequately mitigated when compared with a reformed national pricing model. Among the key risks cited were:
- Investment uncertainty, due to volatile locational pricing
- Distributional challenges that could lead to regional disparities
- The lengthy and complex implementation process required to roll out such a system
Instead, the government will pursue a “cohesive package of reforms” within the current national pricing model, focusing on measures that aim to lower costs, improve system efficiency, and support the clean energy transition.
What’s Next? A Roadmap for Reform
The REMA publication outlines several key steps the government will take:
- Transmission Infrastructure Expansion: New buildouts will follow the Strategic Spatial Energy Plan (SSEP) and the Centralised Strategic Network Plan (CSNP) to reduce congestion and improve grid reliability.
- Smarter Siting of Renewable Assets: Future energy generation will be better aligned with network capabilities to minimise strain and costs.
- TNUoS Reform: Changes to Transmission Network Use of System (TNUoS) charges—a significant cost component for generators—are planned to reduce volatility and increase investor confidence. These reforms will be developed with Ofgem and implemented no later than 2029.
Mixed Reactions Across the Energy Sector
The government’s decision to reject zonal pricing has been met with a wave of responses from across the energy industry—some praising the move for maintaining stability, others criticising it as a missed opportunity.
Ross Driver, fund manager at Foresight Solar, welcomed the approach:
“We need evolution, not revolution, to support the renewable energy build-out and future-proof our electricity network. Achieving net-zero is challenging enough without shifting the goalposts.”
In contrast, Caroline Bragg, CEO of the Association for Decentralised Energy (ADE), voiced concern:
“By rejecting zonal reforms that align us with our peers, today’s decision risks higher costs. Piecemeal tweaks won’t deliver the lower bills for all that Ofgem itself says is possible.”
Final Thoughts
The UK government’s decision to maintain a unified electricity market reflects a cautious but measured strategy to reform the energy system without disrupting investor confidence or adding regional complexities. While the debate over zonal pricing is unlikely to disappear entirely, the REMA reforms suggest a focus on incremental improvements and long-term network planning as the country moves towards its net-zero goals.
With more detailed plans expected later this year, all eyes will be on how these reforms are delivered—and whether they can live up to their promise of a cheaper, cleaner, and more efficient power system.
References
- https://www.gov.uk/government/publications/review-of-electricity-market-arrangements-rema-policy-decision
- https://www.ofgem.gov.uk/publications/rema-open-letter-locational-signals-electricity-market
- https://www.energylivenews.com/2024/12/05/octopus-energy-joins-calls-for-zonal-pricing/
- https://solarenergyuk.org/news/solar-energy-uk-responds-to-rema-decision/
- https://www.theade.co.uk/news/press-releases
