Is Ed Miliband going to announce a move towards a zonal electricity market, where wholesale prices would vary between regions of Britain? It would appear to be on cards following the Energy and Climate Secretary’s interview on the Today programme in which he said he was considering the idea.
Miliband’s apparent support for the plan follows intense lobbying by Greg Jackson, CEO of Octopus Energy as well as support from the National Energy System Operator (NESO), the new government-owned company which oversees the grid. However, zonal pricing is bitterly opposed by others in the energy industry, including Chris O’Shea, the generously-moustached CEO of Centrica, and Dale Vince, CEO of Electrocity as well as Labour donor and erstwhile financial backer of Just Stop Oil.
The argument for zonal pricing is that it is supposed to encourage more efficient use of electricity. At the moment we have growing numbers of wind farms in the north of the Scotland, a long way from centres of population where consumption of electricity is at its greatest. This causes huge bottlenecks in the grid – which was designed around a cluster of coal-fired power stations in the Midlands and South Yorkshire. As a result, much of the electricity generated by wind farms cannot be fed into the grid and so is wasted. Consumers are forced to compensate wind farm owners for this through so-called constraint payments. Last year consumers paid £1.5 billion in this way, hidden in their bills. This is set to grow as the number of wind farms runs ahead of required improvements to the grid.
The argument for zonal pricing is that it would encourage users to consume electricity closer to where it is generated, thus obviating the need for some of the improvements to the grid. According to a report by FTI Consulting, commissioned by Octopus, it could save consumers £3.7 billion a year.
Sorry, but it doesn’t pass the smell test. Clearly, zonal prices have the ability to save money for consumers who live in zones where there are large numbers of wind and solar farms – they might find themselves enjoying virtually free electricity at times – although they might also find themselves paying through the nose on windless and cloudy days if there are not many gas power stations in their zone to back up the wind and solar farms. But how is it going to save money for consumers in London and the South East, where there are fewer wind farms?
The idea that high-volume users of electricity will be encouraged to move to parts of the country where there are more wind farms seems somewhat doubtful. Our remaining steel works are not going to move to the Western Isles to save a bit on their electricity; they will move to China. As for data centres, they are not going to move to the Isle of Lewis, either. They don’t just need large volumes of electricity; they need fibre cables, too, which would have to be laid at huge expense. Nor is housing development going to be deflected to remote areas just because of cheaper electricity; people need to go to work, go to school or college; you can’t relocate whole cities on the promise of lower electricity prices.
The problem really lies with trying to build an electricity grid that is over-reliant on intermittent wind and solar energy. So long as we try to do that we are going to have a huge problem matching supply to demand. Zonal pricing does nothing to address the mismatch in temporal patterns of electricity generation and consumption; it only tries to tackle the geographical mismatch. The claim that it will save us money is fanciful; what would save us money is not trying to rush through net zero targets when we have neither the technology nor the infrastructure to sustain them.
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