Policies designed to suppress electricity prices could scare away much-needed investment in our electricity system. In this regard, there are few policies scarier than locational pricing.

Locational or zonal pricing is the high-risk, high-reward option for electricity market reform. It could save the UK tens of billions of pounds, create a more efficient grid and encourage greater investment in energy storage and generation. Locational pricing would be a boon for storage south of the border, less so for wind developers in the north. It could also serve as political poison. Voters in regions facing higher prices will be up in arms, as will developers in areas where prices are expected to fall. It would take years to design and implement a reformed electricity market with regional pricing, which would risk cooling investment while the details are ironed out.

The scheme has provoked much debate, with energy secretary Ed Miliband this week insisting “absolutely no decision has been made” on a potential move to zonal energy pricing.

If the Review of Electricity Market Arrangements (REMA) rejects locational pricing, what else could be done? The main culprit pushing up electricity prices is gas and its price-setting power across the UK energy market. REMA has said no to split markets and green power pools. But perhaps if the UK simply builds – and connects – enough renewables, it will free the market from the dictates of natural gas prices. Perhaps.

For this to work, the UK needs to address major grid constraints as fast as possible, build a lot more storage and ramp up demand flexibility. Even then, the country’ssingle national price will remain a problem. Long-duration storage might well replace gas plants as the marginal producers when renewables falter. But the risk is that without savvy policy making the UK could simply swap one set of dominant price diktats for another. There is a power imbalance in the UK power market that will have to be tackled sooner or later.

The UK’s energy transition journey has earned it accolades. It has pioneered market-based mechanisms to scale renewables and created one of the largest offshore wind sectors in the world. It has stripped coal from its grid forever. Among the largest OECD economies, no other country has cut emissions faster since 1990. But the UK also has the highest electricity prices in the OECD.

This is a problem that can no longer be avoided. When it comes to climate action, politicians like to portray the UK as setting an example for others. But increasingly the UK is an example of a country that has added gigawatts of low-cost renewables yet still has punishingly high energy bills. The future of the country’s steel industry – which has long sounded the alarm over electricity prices – is again making headlines.

Against this challenging backdrop, the government has set itself two goals that do not necessarily slot together neatly. The first is to lower energy bills for consumers. The second is to generate 95% of electricity from low-carbon sources by 2030. A clean power system will require a high volume of new infrastructure, which means a huge volume of new investment.

In the absence of fundamental market reform, there would still be some tinkering around the edges to be done. When the government first decided to fund renewables through a contract-for-difference (CfD) mechanism, it opted for industrial, commercial and residential customers to shoulder the cost. It did not have to do this, and it could still choose not to. Last year’s ‘British Industry Supercharger’ policy offered some respite for heavy power users. Industry group UK Steel has suggested a two-way CfD as a further measure to protect a critical industry from high prices.

Residential consumers eager to see prices fall, but not at the expense of new pylons, could be offered cash incentives. The weight of green levies could be shifted from electricity bills to gas bills in order to help incentivise customers to go green faster. But of course, every policy – whether a tweak or a transformation – creates losers as well as winners. Poorer households are more reliant on gas and may struggle to switch. Cash incentives for proximity to infrastructure could be seen as buying consent.

The UK energy market needs a strong, well-crafted policy cocktail to deliver a cleaner grid and lower energy prices. But not everyone is going to like what it does to their bills or bottom line.

On May 7, E-FWD invites you to an Aberdeen breakfast briefing to discuss what comes next for the North Sea’s energy sector.

Expect real talk, sharp insight, and high-level networking – all in one morning.

Join us for two pivotal workshops – your voice matters.

1) What’s next for the North Sea’s fiscal regime?

2) Can electricity reform support Scotland’s offshore wind ambitions?

Be in the room. Join the discussion. Help shape the future of energy.

Aberdeen, Marcliffe Hotel | 🕗 07:30 – 11:30 | 🗓️ May 7, 2025

To attend the event, please register here

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