We're all going to pay for Ed Miliband's zonal pricing folly

Spectator

2 days ago

Philosophers have debated the concept of 'fairness' for centuries. Intellectual heavyweights like Immanuel Kant, Karl Marx, and Aristotle have all had their say. They need not have bothered. The world finally has a definitive answer and it has come from the most unlikely of places: the Department for Energy Security and Net Zero's 'Review of Electricity Market Arrangements: 2025 Summer Update'.
Even if you have an unshakeable faith in Ed Miliband's ability to plan a huge chunk of the economy from his desk in Whitehall, you must admit this is sub-optimal
It just so happens history's most influential thinkers were miles off the mark. Fairness, it turns out, is when everyone in the country sees their bills go up so we can pay wind farms in Scotland to switch off when it is, er, windy in Scotland.
The most intense debate in British energy policy is over. Ed Miliband has rejected proposals to break up Britain's electricity market into 12 regional zones that better reflect the actual physics of the energy system.
The idea behind the zonal pricing Miliband has rejected is simple. Prices should reflect what things actually cost and are worth. At the moment for electricity they don't. In essence, we pretend that it doesn't matter whether a watt is produced in the Shetland Islands or in South-East England. It's all one price.
In reality, location matters. Short-sighted regulators, Nimby campaigners, and National Grid penny pinching mean we haven't built anywhere near as many pylons and transmission towers as we need. That's a big problem when grid bottlenecks mean that Scotland's wind farms regularly produce more power than Scots can consume or send to England.
Electricity isn't like other markets. When the EU's Common Agricultural Policy guaranteed high prices for butter and wine, we ended up with butter mountains and wine lakes. Wasteful? Yes. Absurd? Entirely. But an excess of these products didn't cause any other problems. When you have too much electricity though you end up with Spanish-style blackouts. Put simply, our grid needs to balance. Put too much power in it and bad things happen. The lights go off. Expensive equipment blows up.
So when supply is on course to outstrip demand, urgent intervention is needed. At the moment this means wind farms in Scotland that have been paid an artificially high price to produce electricity are then paid again – at the last minute – to switch off.
This, to be clear, isn't a hypothetical scenario. In 2024 billpayers handed companies such as SSE Renewables a collective £393 million in 'constraint payments' to stop their blades spinning. They then paid gas plants near where the demand actually was £1.23 billion to fire up at uncompetitive rates. National Grid warns these combined payouts could hit £8 billion a year by 2030. Off the coast of Angus, sits Scotland's largest offshore wind farm Seagreen. Since it came fully online in 2023, almost two-thirds of its potential output has been dumped.
You start to see why the CEOs of renewable developers can barely contain their delight at the news zonal pricing is off the table.
For the rest of though it's a missed opportunity. Texas uses an extreme form of locational pricing, with thousands of individual price nodes (well over 4,000). This has created a battery boom in the windy west. These batteries charge up when energy is cheap and power the grid when prices are high. Britain's batteries, by contrast, go where land is cheap and grid connections are available. In other words, not where batteries are most needed.
Even if you think the downsides of a zonal system outweigh the benefits, it is impossible to deny the status quo creates big (and expensive) problems that need to be solved. Hence the government's new slogan: a 'reformed national market'. As the Guardian reports, the department's 'brainpower' is now focused on getting the benefits of zonal pricing without doing zonal pricing.
Their inevitable answer? Central planning (and subsidies). Want data centres to move north, where wind is plentiful? Without price signals you can only bribe them or order them to go there. Want more batteries in Scotland? Ditto. Even if you have an unshakeable faith in Ed Miliband's ability to plan a huge chunk of the economy from his desk in Whitehall, you must admit this is sub-optimal.
All of this should infuriate greens. Almost half of Britain's emissions come from two things: petrol cars and gas boilers – just one tenth comes from electricity. When it comes to decarbonisation, electrification is the only game in town. What matters most is not making electricity greener, it's making electricity cheaper. Bogus fears of a 'postcode lottery' and aggressive lobbying from wind farm owners have locked us into a policy that will do the opposite.