Zonal Pricing Volume Risk and the 2030 Clean Power Target: Working Paper

This Working Paper provides an update to the UKERC Discussion Paper published in March 2025 on the interactions between the possible introduction of zonal pricing and transmission build rates in the GB electricity market. This paper contains full methodological details to complement the analysis published in March. 

UKERC is independent of government and industry and has no vested interest in, or organisational position on, zonal pricing. As with all contentious topics, UKERC participants may hold a range of views. This report does not seek to assess all of the complex pros and cons of locational pricing. It seeks to address an important issue that has a material impact on forthcoming renewable energy auctions, and hence on clean power targets. 

This analysis suggests that implementing zonal pricing before resolving transmission uncertainties risks “putting the cart before the horse,” exposing investors to unnecessary risks that could negate some of zonal pricing’s benefits. The alternative to delaying the introduction of zonal pricing until uncertainties over transmission build are resolved, would be fully compensating prospective bidders for volume risk, though it is currently unclear whether or how this could be done.

Volume Risk and CfD Prices

The UK Government is considering implementing zonal pricing in Great Britain’s electricity market. This could significantly impact upcoming Contract for Difference (CfD) auction rounds, critical for meeting its Clean Power 2030 Mission (CP30). This independent analysis explores how uncertainty over zonal pricing and transmission capacity expansion affects investor risk and consumer costs.

The Clean Power Mission requires at least 20 GW of new wind power to be delivered in forthcoming CfD Allocation Rounds, much of it in Scotland and Northern England. Connecting this generation to demand centres necessitates major transmission upgrades, which the Clean Power Mission is seeking to accelerate. The Government has promised to decide on zonal pricing before the next CfD auction in July 2025.

UKERC’s modelling reveals three key findings:

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.

Moving South

Zonal pricing, combined with transmission constraints, could reduce generation investment in constrained regions. To illustrate the impact of this we also explore ‘Plan-B’ scenarios that try to meet the 2030 targets by replacing on/offshore wind in Northern Britain with additional onshore wind and solar located further south in England and Wales. Three experiments were conducted:

1. Maintaining total renewable generation with onshore wind-dominated additions in England and Wales: This fails to meet CO₂/gas reduction targets.
2. Meeting CO₂ targets with onshore wind-dominated additions in England and Wales: This significantly increases total new capacity needed, generation costs and GB-wide curtailment.
3. As experiment 2 but with equal shares of new wind and solar in England and Wales: Curtailment increases less than Exp. 2, but costs still increase, and even more new capacity must be added.

More capacity is required because output is less correlated with demand and capacity factors are lower, which also drives increased GB-wide curtailment. Replacing 15 to 20 GW of on/offshore wind in Scotland/Northern England would need an extra 17-33 GW of onshore wind and 5-25 GW of solar in England and Wales. This would require around 400-800 additional wind farms and 100-500 solar farms – a five-to-nine-fold increase on current installed capacities.