As part of the UK government’s Review of Electricity Market Arrangements (REMA), the Department for Energy Security and Net Zero (DESNZ) is exploring a move to zonal wholesale electricity pricing in Great Britain.

In a new report for SSE, we explore two critical questions raised during the course of discussions on zonal pricing:

• Can policymakers rely on findings that consumers in all GB regions would benefit from the introduction of zonal pricing?
• Will a zonal market better support demand-side flexibility?

Gains to consumers in all GB regions cannot be relied upon

We conclude that it cannot be relied upon that all consumers would benefit under a zonal market. Given the nature of modelling, small changes in underlying assumptions (such as commodity prices or the extent of market power) can easily flip projected outcomes for individual groups of consumers.  A modelled scenario in which all consumers gain can easily switch to one where some gain and some lose.  

The sensitivity of modelling results to such small changes is magnified by a tendency for claimed efficiency benefits to be overstated.  For example, overstating the extent to which investors can respond to investment signals, understating the potential for improvements in a Reformed National Market, and not appropriately taking account of potential impacts on cost of capital.  Gains to consumers may also be reduced by transitional arrangements, given the likely policy direction to protect existing investors from the change.

No silver bullet for flexibility

We also find little clear evidence to suggest a zonal market would offer a superior framework for demand-side flexibility. Locational signals already exist within today’s system and could be enhanced more rapidly and effectively through reforms to the current national market. With most consumers engaging with the market via third parties, and the fact that these third parties can and do use locational signals to exploit the value of consumer flexibility, there's no clear reason why zonal price signals would make it easier to shift demand. In addition, if a zonal market increases the impact of market power on individual groups of producers or consumers, policy interventions required to manage market power could undermine any flexibility gains.

This research forms part of Frontier’s ongoing work to support evidence-led energy market reform. Read the full report to explore our findings in detail – and what they mean for the future of electricity market design in Great Britain.

Click here to read the full report Impacts Of Zonal Pricing On Consumers And System Flexibility