This summer the windfarm dubbed the most productive in Britain stood idle in the country’s windiest area. The Viking windfarm in the Shetland islands is expected to harness the UK’s most abundant wind resources to generate enough electricity to power almost half a million homes. But in August the windfarm fell still on most days.
The problem is the UK’s power market. Although wind speeds in the Shetland Islands are ideal for the spinning blades of a windfarm, they hold less appeal as a base for homes and businesses, meaning the energy demand of the local area is low.
The cables used to transmit the electricity generated there to power grids on the Scottish mainland can help to a point. But on bright, breezy summer days there is still the risk of overloading the local grid with more power than can be transported to the south of the country. When this is the case, the windfarm is paid to turn off.
These “constraint payments” amount to billions every year as renewable energy projects across the country are paid to switch off at the expense of customer energy bills. Investing in a march of new pylons and power lines to move electricity to areas of high demand will help – but these come with costs of their own.
The answer? Government officials are hoping to correct the clear inefficiencies in the market by overhauling the market itself.
Under plans put forward as part of a consultation launched by the previous government, the existing market for electricity could be replaced with seven market zones, each with their own market price. Areas in Scotland with high levels of clean electricity generation and low demand could expect lower prices, while urban areas in the south of England with high demand but limited renewable energy projects would see higher prices.
The plans amount to an upending of Britain’s energy market as it has existed for decades. Those in favour of the change argue that a full-scale overhaul of the electricity system is urgently needed to match the revolution ushered in by Britain’s swing from fossil fuels to clean energy, by reducing the cost of constraint payments and power grid upgrades.
Greg Jackson, the founder of Octopus Energy, told the Guardian: “It’s grotesque that energy costs are rising again this winter, whilst we literally pay windfarms these extortionate prices not to generate. Locational pricing would instead mean that local people got cheap power when it’s windy. Scotland would have the cheapest power in Europe, instead of among the most expensive, and every region would be cheaper than today. Companies would invest in infrastructure where we need it – not where they get the highest subsidies.”
The changes could catalyse an economic osmosis of high energy users– such as datacentres and factories – into areas of the country with low energy prices, creating new job opportunities beyond the south-east.
It could also spur the development of new energy projects – particularly rooftop solar – across buildings in urban areas where energy demand is high. This rebalancing of the energy market could save the UK nearly £49bn in accumulated network costs by 2040, according to a study commissioned by the energy regulator from FTI Consulting.
But others fear the changes could come at a deeper cost to Britain’s climate goals – and bill payers too. The clean energy companies preparing to spend billions on building new wind and solar farms are concerned that a redrawing of the market boundaries could radically change the economics of new renewable energy projects – which would ultimately raise the costs, which would be passed on to consumers, or see the projects scrapped altogether.
Nick Hibberd, a policy analyst at Renewable UK, the industry’s trade group, said: “This uncertainty has massive cost implications. A single percentage point increase in the cost of capital for low carbon generation would add £45bn to the cost of delivering net zero up to 2050, and analysis suggests the impact of zonal pricing could be as high as 2-3 percentage points. In short, the additional costs of zonal pricing could be around £90-135bn, surpassing any theoretical benefits of introducing it.”
With stiff competition in the international markets for investment in clean energy, Renewable UK fears that companies and their investors will simply choose to build new clean energy projects elsewhere.
“We need to mobilise billions of pounds of private investment in new renewable energy and grid infrastructure over the coming decade, and beyond, if we’re going to build a lowest cost clean energy system for bill payers and move towards being a net exporter of electricity. That’s why we’re asking the government to take a careful approach to energy market reform, evolving the current system as opposed to more revolutionary reforms like zonal pricing which risk jeopardising investment by increasing the cost of capital across all technologies,” Hibberd said.
The debate has driven deep rifts across the industry, between modernisers who believe the new price signals would give rise to a new, rational market and those who fear the changes risk unravelling Britain’s low-carbon agenda.
“This has been the most bruising debate to play out in the energy industry in the last 15 years. I’ve fallen out with people; there have been some very nasty arguments,” said one industry source.
The government has tasked analysts at LCP Delta and Grant Thornton to prepare an independent analysis of the benefits of replacing the UK’s decades old market with a series of market zones that reflect different pricing dynamics within each area.
The analysts found that there is a need for the market to provide efficient locational signals to minimise system costs. But what is less clear is how the unintended consequences may impact bill payers and clean energy developers. These could have huge implications for how the government chooses to implement any changes to the market.
George Martin, a senior consultant at LCP Delta, told the Guardian that depending on how locational pricing is implemented the benefits for bill payers would vary across the country.
If consumers are fully exposed to these plans then those in the higher price zones in southern England may pay more for their energy than those in lower price zones in Scotland, he said. Even when taking into account the wider benefits of a more efficient system there’s no guarantee that consumers in the south of the country would not end up paying slightly more overall under this proposal, he said.
“The government will need to decide whether households should be fully included in the locational prices. One route forward could be that households are shielded from the zonal price but the overall savings are averaged across bill payers in all parts of the country – this would mean the savings wouldn’t be as great for those living in Scotland, for example, but it would shield those living in high-demand areas in the south,” he said.
This strategy would still leave non-household energy users – such as businesses and factories – exposed to electricity prices dependent on their location. UK Steel, which represents the industry, fears that steel makers who are switching from fossil fuels to electricity could be stung by higher prices if they aren’t able to relocate into zones with lower price signals.
Gareth Stace, the director general of UK Steel, said: “The government’s own analysis shows that zonal pricing will increase electricity prices for the steel industry, damaging its competitiveness and preventing the sector from thriving.”
“It is bizarre that some are suggesting that zonal pricing would reduce prices for all consumers when they do not have the evidence to support this,” he added.
The government is expected to make a decision on how to proceed in the coming months, but the fierce debate between warring factions of the energy industry is likely to continue for far longer.
