SCOTLAND would have the “cheapest electricity in Europe” and could even have free power at times if zonal pricing was introduced, an Octopus Energy chief has said.
Rachel Fletcher, director for regulation at the company, told The National that Scots were getting the “raw end of the deal” in the UK’s outdated energy market which she has insisted could turn into a “national scandal” in the years to come.
She said that if zonal pricing was introduced – which would better reflect the supply and demand balance – Scots could at times benefit from “negative” energy prices, where you are effectively paid to use electricity or are getting it free.
It comes after Octopus CEO Greg Jackson also said Scotland could have free electricity at times if Ofgem changed its regulations.
At the moment, Britain has one national energy price even though at any point in the day the cost of producing electricity differs radically around the country.
It costs money to move electricity from where it is produced to where it is needed. Under the current market, if an offshore wind farm in Scotland produces more electricity than the network can handle it is paid to turn off, or "constrained" and a gas-fired power plant in the south of England is paid to turn on.
The constraint costs – which are collected from consumers – are huge and in 2022/23 they amounted to £1.5 billion and are projected to rise to £3.7bn by 2030, something Octopus considers a “staggering waste of electricity”.
Zonal pricing would split the UK up into several different geographical zones with each having a different price based on its level of supply and demand. Energy consumers would pay less for electricity if they are based close to electricity projects but more if they are based further away, meaning Scotland – with its abundance of renewables – would benefit enormously.
Octopus says this would make the energy system much more efficient, helping to match demand to where energy is plentiful, cheap and green.
Asked if Scotland was getting the raw end of the deal, Fletcher told The National: “Definitely.
“With zonal, instead of Scottish people getting a raw deal, and watching the turbines not turn knowing that those companies are getting paid for it, we could be attracting new industry into Scotland, Scottish consumers could be having multiple periods of the day and the year when energy prices are potentially negative where you’re paid to use electricity or at least [get it] free.
“We’re already trying to make it clear to our customers when the wholesale price is low and give them access to free electricity periods. We could be doing that more often if we had proper zonal pricing where you could see the areas where there is excess wind or solar, and instead of paying for that to turn off, let’s encourage people to use it.”
Fletcher said from having family in Scotland, many of whom live close to wind farms, she understood the sense of outrage people feel over not reaping the benefits of being close to renewable generation.
“Constraint costs are going up all the time and I know – because I’ve got a lot of family here [in Scotland] some of whom live in areas with lots of wind farms – that sense of outrage of not seeing any benefit in terms of lower prices because these wind farms cut off and are being paid to turn off,” she said.
“Something big has to change. The current system we have got, with constraint costs going up and up, is not sustainable and the paying wind farms to turn off is going to turn into a national scandal. I think the Government knows this.
“Some of the biggest savings for customers [from zonal pricing] would be in Scotland and the north of England because a zonal price will reflect the local supply and demand balance, so if you’ve got excess supply then there’s going to be many points in the day and across the year when the price of electricity is going to be very low and people in those areas will see that in their bill as opposed to now where everybody faces the marginal cost of gas even if you’re in an area that’s very rich in renewables.”
Fletcher explained how analysis has shown that zonal pricing would give everybody in the UK a lower electricity bill.
Based on Octopus’s own modelling tracking what a zonal price would be vs the current wholesale price, over the last 12 months some areas of the UK would have paid £2 billion less and that’s with no changes to where generators or industry are siting.
Earlier this year, former UK energy secretary Claire Coutinho set out proposed measures to switch to zonal pricing but Fletcher said no results from the consultation had been released.
With the price cap having gone up by 10% this month, Fletcher said it is becoming more frustrating the UK is not making the most of the “massive opportunity” zonal pricing would bring.
“Britain has got some of the highest, if not the highest prices in Europe. The analysis that’s been done on zonal pricing has shown Scotland would have the lowest electricity prices in Europe,” she said.
While Fletcher said she agreed with having a price cap – which ultimately protects everyone’s access to a fair price – she said the way the market currently works still leaves energy providers in a “horrid situation”.
“It’s why we’re so passionate about zonal pricing because the best way to get the very low cost of green power benefiting people’s energy bills is to split up the current wholesale market price so that customers are not paying the very huge cost of constraining off excess wind,” she said.
“We’re trying to create a more efficient system in terms of where big new factories and big generators locate.
“We should be trying to get generators closer to where demand is and we should be encouraging big electricity users like data centres and hydrogen producers to go to places like Scotland where we’ve got too much power for the local grid and where everybody in the country is having to pay to constrain off, to turn off that extra wind.”
