Zonal pricing could push 10GW of offshore wind into Southern England 

The introduction of zonal power pricing could push 10GW of additional offshore wind to locate in Southern England by 2050.  

This generation would largely come from Northern England, which would nevertheless remain host to the largest offshore wind capacity in Great Britain, according to analysis commissioned by the government as part of its Review of Electricity Market Arrangements (REMA). 

The research by LCP Delta and Grant Thornton compares various scenarios for zonal pricing with the counterfactual of national wholesale power pricing. The government has ruled out the option of more granular nodal pricing for its second REMA consultation launched earlier this week. 

In its core scenario, the study suggests that zonal power pricing would reduce overall system costs by more than £5.2 billion and save consumers £24.4 billion between 2030 and 2050, assuming current redispatch inefficiencies are resolved in the counterfactual. 

These inefficiencies – mainly related to the exclusion of interconnectors from the Balancing Mechanism and the skipping over of batteries – are also assumed to be resolved in its core scenario.  

If they were not resolved in the counterfactual, the study says zonal pricing could reduce system costs by £15.5 billion and save consumers £59 billion. The two sets of figures are cited by the Department for Energy Security and Net Zero (DESNZ) as the range for the potential benefits of zonal pricing in the second REMA consultation document.  

Both the core scenario and the counterfactual assume that annual electricity demand grows to almost 800TWh by 2050 as envisioned in DESNZ’s higher demand Net Zero scenario (NZH), and there is no further network build beyond the projects included in the Electricity System Operator’s seventh Network Options Assessment and its Holistic Network Design.  

The paper notes that the avoidance of network reinforcement costs is one of the benefits touted by supporters of locational pricing, meaning the analysis may underestimate the savings in this regard.  

The core scenario additionally assumes that generators with Contracts for Difference are fully exposed to zonal pricing by retaining national market reference prices, and that the cost of capital is unchanged.  

Opponents of locational pricing argue that it would increase revenue uncertainty for generators and therefore financing costs. The study states the headline £5.2 billion decrease in system costs from zonal pricing could be completely wiped out by a 0.3 percentage point increase in the cost of capital.  

This reduction in system costs would primarily result from a £5.4 billion decrease in interconnector costs due to lower imports and higher exports. Carbon costs would also fall by £1.2 billion due to a drop in gas generation, although generation costs would rise by £1.4 billion as more power is exported to Europe.  

The study adds that the reduction in system costs would be dwarfed by the wider savings to consumers of £24.4 billion, most of which would come from electricity producers, which would see their costs rise by £19.2 billion.   

Congestion rents – the revenues network operators would generate by moving electricity from less expensive zones to more expensive ones, which are assumed to be returned to consumers though reduced network costs – would amount to £22 billion. Constraint costs would be cut by £23 billion, and policy costs by £0.5 billion. These savings for consumers would be offset by a £21 billion increase in wholesale costs.  

If the counterfactual and the zonal pricing scenario assume that annual electricity demand rises to roughly 500TWh as foreseen in DESNZ’s lower demand Net Zero scenario (NZL), then the overall consumer benefits of zonal pricing drop to £14.1 billion, while the system benefits disappear almost entirely.  

Pricing and location 

The findings are based on modelling of 12 zones based on the capacity available across key transmission boundaries. Upon the introduction of zonal pricing in 2030, the report estimates that demand-weighted average prices would vary by £12/MWh between zones, ranging from £25/MWh to £37/MWh. The national average would be £31/MWh.  

The report states prices would rise in real terms, averaging £43/MWh across Great Britain by 2050. However, the maximum variation between zones would remain relatively consistent, peaking at £13/MWh, including in 2050.  

Zones A, B, C in Northern Scotland would be the cheapest throughout the period examined due to high volumes of wind generation and relatively low demand. Zones J, L and I in South and Central England would be the most expensive due to high levels of demand.  

Zone L, the southernmost zone, would have the highest prices for most of the period. However, by 2050 zone I in Central England would become the most expensive, with prices hitting £51/MWh. The least expensive at this point would be zone B in North Scotland, with an average price of £38/MWh.  

(Note: the pricing figures above are given in 2022 prices).  

The total capacity of each generation technology was held constant when comparing the core zonal pricing scenario and the counterfactual, meaning the variation in prices merely affected where this capacity would choose to locate and not how much would be built.  

Assumed generation capacity in NZH scenario

By 2050, the biggest net difference in generation capacity within a single zone would be 10GW. “While initially this may indicate a small relocation impact from the increased locational signals locational pricing brings,” the report explains, “this is masked as movements of different technologies are offsetting each other and changes within any single technology are more pronounced”.  

Zone L in Southern England would see the biggest net increase under zonal pricing, while zones G and K in Northern England and East Anglia respectively would see the biggest net decreases.  

Total generation capacity in 2050

Around 10GW of offshore wind would relocate to Southern England. Most of this would come from zone G in Northern England, which would lose 10GW of offshore wind but would nevertheless have the most capacity of any zone. There also would be reductions in zones F and K.  

Despite having lower prices, zones A and C in the North of Scotland would see gains due the higher load factors available there. Overall offshore wind capacity in Scotland would increase by 4GW.  

Offshore wind generation capacity in 2050

There would be no difference in the location of onshore wind in England and Wales due to the assumption of continued planning restrictions. However, there would be a shift within Scotland as capacity in zone E is shifted to zones A and B, particularly the latter.  

Solar capacity would be pushed from zones L and K in Southern England and East Anglia to Central and Northern England and Wales. In the counterfactual of national pricing, zone L in Southern England would be the main host of solar capacity, but in the zonal pricing scenario this would be zone J in Central England.  

Other trends would include the shifting of battery capacity from north to south, especially to Southern England, and of electrolyser capacity from south to north both within England and Wales and within Scotland.