Modelling by the UK Energy Research Centre (UKERC) has shown that the implementation of zonal pricing could increase strike prices in upcoming Contracts for Difference (CfD) auctions by up to £20/MWh, potentially raising consumer costs by as much as £3 billion annually.
The modelling suggests that investors would factor in the additional risk posed by transmission capacity uncertainty, leading to higher strike prices. These elevated costs could offset some of the financial benefits expected from zonal pricing, which is designed to better reflect regional variations in electricity prices.
The study also indicates that while zonal pricing risks could diminish over time as transmission infrastructure is developed, its introduction should ideally be postponed until key transmission uncertainties are resolved. In the meantime, the combination of zonal pricing and transmission constraints could potentially deter investment in generation projects in certain regions.
Professor Rob Gross, Director of UKERC, emphasized the challenges of introducing zonal pricing too early: “The 2030 clean power mission is an exceptionally bold endeavour that requires coordinated action across government and industry to mobilise an unprecedented pace of investment in generation assets and transmission capacity.”
He added, “Our analysis focuses on the risks for market participants if Government tries to bring in zonal pricing at the same time. These are substantial and there is no straightforward plan B. The key question is not whether zonal pricing has benefits, but whether the time to introduce it is now.”
The UK government has set ambitious targets to transition to clean power by 2030, and balancing the financial and operational risks associated with transmission infrastructure is seen as a key challenge in achieving these goals.
