Kwarteng raises postcode lottery fears over local electricity pricing

Kwasi Kwarteng has expressed doubt that localising the wholesale price of electricity is politically feasible because households may baulk at having paying different bills depending on where they live in the country.

In a keynote interview for Aurora Energy Research’s Spring Forum on Thursday (14 July), which had been pre-recorded due to the recent uncertainty surrounding the government, the business and energy secretary was quizzed on proposals to shift to locational pricing of wholesale electricity.

Moving to locational pricing, which has been adopted in some US states, has been championed by organisations like the Policy Exchange think tank, the Energy Systems Catapult and National Grid Electricity System Operator (ESO).

Proponents for locational pricing argue that splitting the wholesale market into a number of zones or nodes, each with their own wholesale price, would cut system costs and spur the development of intermittent renewable generation by allowing greater balancing of the grid at a local level.

However Kwarteng poured cold water on the idea.

He said: “Many people on the political side are not necessarily convinced by locational pricing because you would end up in a situation where many people for example in the Lake District would be paying much less or more than people in London or vice-versa.

“Those regional disparities are something that as elected officials we are very aware of and don’t necessarily want to see.”

Despite these doubts, the secretary of state said that he was “very interested” to discuss the concept with the ESO.

Kwarteng also said that structural factors, including the transition from coal-fired generation across large parts of Asia, suggest that the price of gas is “not going to come down anytime soon” and is less likely to drop to the low levels seen during the first wave of the pandemic in 2020.

He also said that it “makes sense” to rapidly reform the wholesale electricity market to ensure that the price of power reflects how much it costs to produce, rather than being based on the cost of marginal gas generation as happens currently.

“As sure as eggs are eggs, it (gas) will be a much less of component of electricity system in 20 years time than it is today.

“It makes sense for us to try and make that transition quickly.”

However, Keith Anderson, chief executive of Scottish Power, warned during a later breakout session at the conference against the risks of rushing wholesale market reform.

“There is a political pressure to try and do that quickly to help resolve the pricing issue and cost-of-living issue, but this is not a quick thing to do,” he stated.

“You are looking at a two to three year process. Otherwise, you have really bizarre consequences on investment for way the market works.”

In a separate session, the ESO’s director Fintan Slye reassured delegates that his body expects generation capacity this winter to be broadly similar to last year’s.

“The bigger risk that we need to be conscious of is the risk to European energy security of supply that has been caused by the invasion of Ukraine. That presents challenges this winter and will made security of supply cross Europe potentially quite difficult.

“If there is a shut off of Russian gas into Europe, the implications of that will still ripple through into the UK because we are a connected market.”

Any shut off of Russian gas could lead to “really, really high prices”, he said.

He also said that keeping open Centrica’s Rough gas storage facility, which was the UKs biggest until its recent closure, would not have provided a “silver bullet” for the UK’s energy security.