UK rejects zonal pricing. So, what happens next?

It has taken years, following a consultation that began in 2022. But in July, energy system players finally got an answer to one of the biggest questions hanging over the UK market: would the current energy secretary, Ed Miliband, introduce zonal pricing? The answer—to the frustration of some and the relief of others—was ‘no’.

The measure would have seen the UK being split into separate electricity pricing zones to encourage the growth of industrial load centres in areas with the greatest levels of cheap renewable energy. But it was dropped over fears it might diminish investment and stifle the UK’s chances of becoming a clean energy superpower by 2030.

Miliband’s decision is understandable. In the long term, zonal pricing could deliver significant advantages to the nation, with FTI Consulting estimating almost £55 billion in net consumer benefits and a more than £25 billion increase in societal welfare across Great Britain between 2030 and 2050. 

However, introducing a novel pricing scheme across Britain would be a major undertaking, adding to market uncertainty precisely at a time when Miliband needs investors to step up their efforts towards creating a 100% clean electricity system by the end of the decade. 

“In order to make an investment case, market participants would need to accurately project future volumes of output they would be able to sell into a zonal market that does not yet exist and where market boundaries (and therefore volume risks) could change during an asset’s lifetime,” the government explained. 

Sticking with the current setup, meanwhile, allows capital flows to continue unhindered. The problem is that the current setup is not exactly ideal, with little strategic oversight of where new generating and storage assets could or should be built. 

So while the government has dispelled the notion of introducing zonal pricing—in this legislation, at least—it has also announced a raft of reforms to create what it says will be a fair, secure, affordable and efficient electricity system.

A summer 2025 review of electricity market arrangements includes measures to “deliver a more strategic and co-ordinated approach to the energy system, provide stronger signals for efficient siting of new assets and improve overall operational efficiency, whilst also increasing stability and certainty for investors.”

The main policies in the reformed national pricing package are: 

• A Strategic Spatial Energy Plan that will assess the optimal locations, quantities and types of energy infrastructure needed to satisfy a range of plausible futures. The first plan, due in late 2026, will detail the locations and timings of new electricity and hydrogen generation and storage capacity by area. 
• Improved balancing and settlement arrangements, such as a lower mandatory Balancing Mechanism participation threshold, alignment of the market trading deadline with gate closure, Physical Notifications that match traded positions, unit-level bidding and maybe shortening the imbalance settlement period.
• A new Transmission Network Use of System (TNUoS) regime, due by 2029 at the latest, that reflects the true long-term system benefits of new generation to (hopefully) decrease TNUoS charging volatility and guide investment to areas where it can deliver the greatest value. 
• Improvements to constraint management through a Constraints Collaboration Project that is looking at options such as using long-term contracts to locate new demand centres in unconstrained locations or increasing the flow of electricity over network boundaries. 
• Closer links to European energy markets, maximising interconnector flows to “explore UK participation in the EU’s electricity trading platforms in all trading timeframes,” plus measures to ensure system operability is maintained as the grid is decarbonised. 

The government has said it will continue to develop the reform package, with a new national pricing delivery plan due for publication in 2025. But for market participants, the decision to abandon zonal pricing already provides a measure of market certainty that was missing until now—and helps clarify the outlook for certain types of assets.

Take battery plants, for example. By encouraging the co-location of industrial demand with renewable generation, zonal pricing would have reduced the need for battery storage to deliver energy arbitrage services and overcome grid congestion. 

With the proposed reforms, however, significant levels of battery storage will still be needed to help shift clean energy from major offshore wind resource areas in Scotland and northern England to load centres in the south of the UK. 

And while the details are still to be revealed, it is likely that measures such as the Strategic Spatial Energy Plan, new balancing and settlement arrangements and the Constraints Collaboration Project could enhance the bankability and feasibility of storage projects through improved siting and economics. 

Towards a fair, secure, affordable and efficient electricity system

Another potential beneficiary is onshore wind, which the government is trying to encourage after a decade’s paralysis. 

Projects in Scotland, which have not been affected by previous planning constraints, will retain previous levels of commercial viability since they will still be able to sell electricity into a UK-wide wholesale market, rather than competing in one of two proposed low-cost Scottish regional energy markets. 

Also, moving TNUoS charging to a longer pricing regime will help provide stability for investment cases as onshore wind is typically charged for network use in Scotland. 

This is all good news for Pacific Green as the company continues to work on battery energy parks in the South of England and now seeks to support the onshore wind buildout across the UK, with at least three projects under development. 

And underpinning Miliband’s various policy moves is a clear desire to stay on course for the full decarbonisation of the electricity system by 2030. 

This remains an extremely challenging target but is laudable at a time when not one of the 40 markets covered by Climate Action Tracker, including the UK, is doing enough to cut net emissions to zero by 2050. 

With the UK seemingly looking to regain its once-prized position as a climate action leader, the outlook is rosy for companies developing clean energy assets such as battery plants and wind farms.