Zonal PricingDecision to rule out zonal pricing in favour of reformed national pricing

DESNZ published its Review of Electricity Market Arrangements (REMA) summer update, setting out its decision to rule out zonal pricing in favour of reformed national pricing.

It noted that the Strategic Spatial Energy Plan (SSEP), to be published next year by NESO following consultation, will be at the heart of the reforms to improve the efficiency of the system under the national pricing model.

Furthermore, in terms Transmission Network Use of System (TNUoS) charges, the update confirmed that the Government will work with Ofgem to ensure that locational pricing signals encourage investors and developers to build generation where it is needed, noting the intention for Ofgem to publish an open letter shortly initiating its review of TNUoS.

It stated that the package of reforms will deliver a more strategic and co-ordinated approach to the energy system, provide stronger signals for the efficient siting of new assets and improved overall operational efficiency, while also increasing stability and certainty for investors.

It added that the implementation of zonal pricing would have created unnecessarily high instability and uncertainty around future electricity prices and zonal boundaries – which would then be passed onto customers in the form of higher prices.

Following this, Ofgem published an open letter outlining its initial thinking on locational signal reforms to network charges, as per the overnment’s RE update.

Ofgem confirmed that locational charging reforms will need to be synchronised with the SSEP and the Centralised Strategic Network Plan, which in turn will guide fgem’s views on anticipatory network investment.

Ofgem posits that network charging signals will play an important role in guiding the most efficient use of the upgraded grid capacity and that reforming network and connection charges is necessary to guide demand and supply sources to locations where grid capacity is available.

Consequently, the regulator states that the extent to which generation projects locate according to the SSEP depends on the strength of locational signals that guide investment in these assets.

There are further suggestions for locational reforms that include changes to network charges to encourage assets to site in areas where spare capacity is expected, so constraints volumes can be reduced.

Additionally, the Contracts for Difference and Capacity Market auctions could incorporate locational factors for specific locations.

Ofgem stated that it will lead on the design and delivery of reforms to network charges to ensure they remain co-ordinated with wider reforms under the reformed national market and is aiming for a reform package to be delivered by 2029

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