Zonal pricing is dead. Now Miliband should be less absolutist on his 2030 goals

The Guardian

4 days ago

The chief executive of the energy regulator Ofgem, Jonathan Brearley, backed zonal pricing. Fintan Slye, the head of the National Energy System Operator, also supported a system that could have led to different parts of Great Britain charging different rates for their electricity. Chris Stark, the head of the 'mission control' unit within Ed Miliband's energy department, declared himself to be 'zonal curious'.
But it's not going to happen. After intense lobbying from both sides of the great philosophical divide in energy-land, Miliband has killed the zonal option. The policy wonks are now obliged to go back to fiddling with internal network charges – the fees paid by generators to access the transmission network – to calculate the sweet spots to encourage more renewable generation where it's most needed, while not stifling it completely in places where, for example, it is windy. That means yet more rounds of consultation.
In the meantime, the maddening 'constraint costs' will clock up. These include the payments to windfarms (usually in Scotland) to turn off when it's too windy because the local grid would otherwise be overloaded, plus those made to other generators (usually gas-fired plants in the south of England) to fire up. Constraint costs, charged to our bills, were £2.7bn last year and are projected to hit £4bn by 2030 – even if the newly commissioned extra transmission capacity actually arrives on time, which it probably won't.
Put simply, too many windfarms were built before the grid could cope. Everybody involved in energy policymaking for the past decade, including a long succession of Tory energy ministers, should be squirming. Octopus Energy, the noisiest advocate for zonal, was able to cite analysis that Seagreen, Scotland's largest windfarm, was paid to restrict its output 71% of the time last year. If the figure is only roughly accurate, it is still excruciating.
Yet Miliband's resistance to zonal is understandable. The switch wouldn't have happened until the mid-2030s, so would have done nothing to reduce constraint costs out to 2030, his target for a clean power system. And the real zonal-killer, even if Miliband didn't quite spell it out, was the cost of disruption. The non-Octopus parts of the industry probably weren't making it up about increased costs of capital under a more uncertain pricing system.
Bids to build windfarms, for example, don't solely depend on the initial contract-for-difference, or price guarantee for 15 years; a developer also has to take a view on the likely wholesale price of electricity once the subsidies drop away. Miliband will have feared the next auctions to build offshore wind would spit out truly painful prices. As it is, this autumn's winning bids will probably arrive well above the current gas-dictated wholesale price of electricity, as described in this column earlier this week. Windfarms are capital-intense projects and the age of cheap money is over.
Miliband is reportedly under pressure from Downing Street to show how his project for clean power by 2030 will bring down bills for ordinary consumers. So he should be.
'Stepping back from zonal pricing does not, in itself, constitute a strategy,' commented Kate Mulvany at the research firm Cornwall Insight, calling for reforms of the national pricing setup to be bold: 'Presently, consumers face the worst of both worlds: paying wholesale prices that are still driven by volatile gas markets, and premium costs to replace gas in the power system with renewables. We cannot assume they will be willing to pay like this for ever. Households and businesses care about affordable, reliable energy above all else. If reform fails to deliver that, the legitimacy of the entire system will be called into question.'
In a similar vein, Marc Hedin at Aurora Energy Research said: 'We need to act quickly to minimise the cost of managing network congestion ahead of 2030, which is a sword of Damocles that could severely hurt bills and the whole credibility of the current framework.'
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Both are pointing to the inefficiencies of the current setup, and the now-vital question of bills. In a world of trade-offs, the imperative should be to bear down on costs. The industry now has more certainty over investment. The next step should be more pragmatism, and less absolutism, about generation targets.
Clean power has been defined, oddly, as 95% low-carbon and the 2030 target itself is arbitrary. Would it really hurt to do, say, 92% by 2032 if it saved consumers billions in their bills by ensuring the grid infrastructure is actually in place in time? That is a question that officialdom has, so far, been reluctant to answer. One hopes somebody is doing modelling because the biggest risk to the government's long-term decarbonisation ambitions would be the election of Reform UK.