Government plan for 'zonal' pricing will curb renewable development and make new wind and solar farms more expensive

This is another piece of neo-liberal nonsense. A few companies earn high revenues at the expense of consumers under the cover of a so-called free market that doesn't exist

Today the Government has announced reforms that will introduce so-called ‘zonal’ or ‘locational’ pricing in electricity markets. It will be disastrous. This will increase the costs of delivering new solar farms and lead to existing wind farms being abandoned. Overall the rate of renewable energy development is likely to decline. It will contribute nothing to the task of balancing increasing quantities of fluctuating renewables on the grid

Developers will be encouraged to build renewable schemes in the areas where there is the most electricity demand and where electricity prices are highest. But, because they are most densely populated, they are areas where there is likely to be the most opposition to the wind and solar farm planning applications.

New renewable energy schemes can make more money in these areas. Since more schemes will be sited in the higher price areas this means that the resulting renewable energy schemes will be more expensive for the country as a whole. This is compared to the present system where wholesale prices are the same throughout the UK.

It is claimed that these zones will be needed to avoid expensive new grid upgrades. They will do no such thing except in the sense that fewer upgrades will be needed because there will be fewer renewable energy schemes built! It is the case now that solar farms in particular are located near the most available grid connections. Creating these new zones will not make their grid connection any cheaper. In reality, the creation of different zones around the country with their own different wholesale electricity prices will lead only to negative consequences both for the consumer and the cost and extent of future renewable energy developments.

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What will happen with locational pricing is that solar farms will be located in the areas which are most densely populated where power prices will be highest. Meanwhile, there will be a decline in the number of solar farms built in other areas. Hence overall the cost of solar power to the consumer will increase as most new projects will be sited in the areas paying the highest prices, that is above the average wholesale price paid at the moment. Moreover, the schemes will be concentrated in those more densely populated areas where the planning opposition is likely to be greater. This is likely to be politically toxic since it will embolden anti-solar farm activists to demand planning curbs on solar farms to be enshrined in national policy.

In the case of wind power, the prospects are even worse. In Scotland, where power prices will be very low because of the amount of wind power already being generated there, existing projects will be closed down immediately when their 15-year ‘contract for differences’ (CfDs) ends. The guaranteed prices provided by the CfDs will end and the windfarms will not have enough income from very low local power prices to cover their operating costs. At present these windfarms can keep running after their CfD ends using the existing nationally based wholesale power prices. They can be repowered with new turbines at a later date.

Meanwhile, there is much less opportunity to site schemes in more densely populated, usually less windy, sites in the South where there will be more planning opposition (and indeed currently banned entirely in England).

Apart from this, as RenewableUK has warned, the uncertainty facing developers about the shape of the new system will make developers reluctant to draw up proposals and this on its own will make financing them more expensive. Plans for new development will be put on ice precisely at the time when they need to accelerate.

Instead of this locational pricing nonsense, the Government ought to be issuing a lot more CfDs to renewable energy developers. This is as opposed to encouraging renewable energy schemes to be sited in areas where, under zonal pricing, they will end up being a lot more expensive for the consumer than is the case at present. Measures specifically tailored to support community energy schemes such as feed-in tariffs and also peer-to-peer trading among community groups need to be implemented.

As far as balancing the increasing proportion of fluctuating renewable energy is concerned what is needed is measures to encourage flexibility in managing demand. Distribution Network Operators (the regional grid companies) need to be given greater powers to encourage the installation of batteries and support schemes to shift demand from one period to another. This will better match the supply of wind and sun at different times to when there is most demand. Locating solar farms in regions of the country where they are going to be most expensive will not help achieve this at all since the sun will still shine at the same time as if they are more cheaply sited somewhere else. In addition, little energy is lost in the transmission system (less than 2 percent according to OFGEM). It is at the local distribution level where most power losses occur and it is at the distribution level where the DNOs need to be given much more of a role as grid managers.

This awful ‘locational pricing’ notion is being pushed because some businesses think that they can make more money out of these new arrangements. But this extra profit will be at the expense of higher prices for the consumer. The ‘locational pricing’ idea seems superficially attractive to many because it is couched in all-too dominant and fashionable ‘neo-liberal’ ‘free market’ language. There is no, and can be no, free market in electricity. Different institutional arrangements will favour different interests. It is about time policy was oriented towards what serves the energy transition best for the benefit of consumers. This is not being done with these proposals.