Zonal Pricing, Volume Risk and the 2030 Clean Power Target

The 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 zonal pricing’s benefits. The alternative to delaying zonal pricing would be fully compensating prospective bidders for volume risk, though it is currently unclear whether or how this could be done. This new Discussion Paper provides an overview of initial findings.

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. UKERC is undertaking independent analysis exploring how uncertainty over zonal pricing and transmission capacity expansion affect 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 onshore wind and solar located further south. Three experiments were conducted:

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

Professor Rob Gross, Director of UKERC, said:

“The 2030 clean power mission is an exceptionally bold endeavour that requires coordinated action across government and industry to mobilise an unprecedented pace of investment in generation assets and transmission capacity. Our analysis focuses on the risks for market participants if Government tries to bring in zonal pricing at the same time. These are substantial and there is no straightforward plan B. The key question is not whether zonal pricing has benefits, but whether the time to introduce it is now.”