Could zonal energy pricing really save households billions of pounds each year? Octopus

The introduction of zonal energy pricing could reduce household energy bills by as much as £3.7billion per year, insiders claim.

Currently, the UK operates on a national pricing model that sees energy prices fixed across the country, regardless of how the electricity is generated. 

This model is also used by other countries like France and Greece.

A zonal model, already used by the likes of parts of the US, as well as Japan, New Zealand and Norway, would see energy prices adjusted regionally, based on supply and demand. 

Octopus boss Greg Jackson claims this would reduce inefficiencies and unnecessary costs.

Currently, wind farms across the country are paid to turn off their energy generation during the windiest days as the National Grid cannot cope with the level of supply.

This, Octopus says, results in some of the highest energy prices in the world.

Cheaper bills: Octopus Energy founder Greg Jackson says the evidence in favour of zonal pricing is ‘overwhelming’

The possibility of a zonal model is currently undergoing consideration as part of the Review of Electrical Market Arrangements, or REMA.

If net zero targets face delays, savings could rise to as much as £5billion per year, according to a report by Octopus Energy and FTI Consulting.

Octopus says a shift towards zonal energy pricing would save £54.9billlion by 2050, if plans to achieve net zero emissions are delivered on time. It says this is a ‘highly conservative assumption’.

If transmission, nuclear and offshore wind projects are delayed individually, it says the savings could increase to £64.4billion by 2050, and if all three are delayed consumers could save £73.5billion in their energy bills.

The report comes after it was announced on Tuesday that UK energy bills will rise by around £111 per year in April, after regulator Ofgem increased its price cap by more than was expected.

Ofgem upped the price cap by 6.4 per cent, taking the average energy bill to £1,849 per year, ahead of the five per cent increase that had been forecast by analysts.

This means bills will be £159 more expensive in April than they were a year ago.

Greg Jackson, founder of Octopus Energy, said: ‘Either Britain sticks with an outdated pricing system that leaves consumers exposed to skyrocketing bills, or adopts zonal pricing and saves over £4billion a year.

‘Zonal unlocks massive savings by encouraging energy to be used nearer to where it’s produced, and at those times it is plentiful, rather than wasted.’

Much of the UK’s wind power facilities are located in Scotland and the North Sea, but there is not sufficient transmission infrastructure to move this energy to areas of demand.

With Labour’s pledge to make the UK’s power supply 95 per cent carbon-free by 2030, concerns have been raised over the masses of electricity pylons that will be needed to help transmit energy around the country – some 370,000 miles of cables and thousands of pylons could be needed, according to experts.

A zonal model, Octopus says, would reduce the amount of cable and pylon infrastructure that needs building.

Jackson told This is Money: ‘Britain needs to build more than double the amount of power lines in the next five years than was built in the last decade. 

‘Zonal pricing has the potential to ease any burdens in infrastructure delays, and the government can embrace a modern system that delivers cheaper, fairer energy while also protecting us from shocks further down the line.’

A zonal system could also see businesses moving towards areas, such as the North and Scotland, where they will pay less for energy, as well as further incentivising the development of renewable infrastructure nearer to areas of high demand, such as major cities.

Indeed, Jackson said: ‘Zonal pricing will drive economic growth in places like Scotland where new energy-intensive industries – such as data centres – could locate and benefit from some of Europe’s cheapest electricity. 

‘Northern Sweden has seen over £70billion invested in green transition industries as a result of their switch to zonal.

Jackson added: ‘With the potential to ease any burdens in infrastructure delays, the government can embrace a modern system that delivers cheaper, fairer energy while also protecting us from shocks further down the line. 

‘The evidence is overwhelming – zonal pricing is the way forward, and we need action now.’

According to a report by SSE, however, the areas of the country paying higher prices accounts for 97 per cent of demand.

SSE, alongside 54 other UK-based firms including Centrica, wrote to the Government last week highlighting their concerns of a zonal pricing system.

Are households convinced about zonal pricing? 

As many as 85 per cent of consumers said proposed zonal energy pricing would not be ‘very fair’, according to research by Fairer Energy Future.

The coalition advocating for ‘enhanced national pricing’, rather than a zonal model, said a zonal system would create uncertainty and disrupt renewables projects, which would need to be put on hold or reworked if a zonal system is given the go-ahead.

An enhanced national pricing system would maintain the national pricing model but would also add additional markets to reduced balancing costs, without the full upheaval a zonal system would require.

The Department for Energy and Net Zero says enhanced national pricing could reduce the average domestic bill by between £20 and £45 per year.

Richard Dunkley, chief executive of OnPath Energy and spokesperson for Fairer Energy Future, said: ‘It is important that the UK government listens to the concerns of the British public and wider industry as it considers the future of the energy network. 

‘Ultimately, consumers and businesses will be paying the price for years to come if we get this wrong.’

Fairer Energy Future said the research was conducted by independent firm Yonder Data Solutions.