ZonalPricing,VolumeRiskandthe2030CleanPowerTarget

For some time, the UK Government undertook a review of electricity markets, known as the Review of Electricity Market Arrangements (REMA). This includes considering a move away from a single wholesale power price everywhere in Great Britain, breaking the country up into multiple zones, each with its own electricity price. Zonal pricing has generated considerable debate among stakeholders, with strongly held views and contradictory evidence emerging on both sides.

This timely project sought to understand how zonal pricing will impact investor risk in upcoming Contract for Difference (CfD) auction Allocation Rounds (AR7-9). These auctions are critical to the success of the Clean Power Mission. The Government has yet to reach a decision about zonal pricing, promising to do so before the next Allocation Round (AR7) takes place in July 2025.

Key findings include:

1. Increased Strike Prices: Zonal pricing could increase strike prices in upcoming CfD auctions by up to £20/MWh, as investors factor in the additional future volume risk that stems from exposure to transmission capacity uncertainty.
2. Higher Consumer Costs: These elevated strike prices could increase consumer costs by up to £3 billion annually, offsetting financial benefits from zonal pricing.
3. Diminishing Future Risk: Zonal pricing risks should decrease over time as transmission infrastructure development unfolds, suggesting that zonal pricing would ideally be introduced after resolving key transmission uncertainties.

The full report provides:

1. Findings of analysis of the impact of volume risk on forthcoming CfD bid prices, and hence, consumers.
2. An exploration of a ‘Moving South’ scenario where uncertainty over transmission upgrades and zonal pricing drives investment away from Scotland and Northern England. ‘Moving South’ assesses the extra onshore wind and solar would be needed in England and Wales to meet the 2030 target, and how this impacts total capacity, costs and curtailment.
3. A discussion of the fundamental economics of high variable renewable systems.
4. Insights into policy implications emerging from the project’s analysis.