The UK Government’s decision on the Review of Electricity Market Arrangements (REMA), published in July 2025, marked the end to the beginning of a long-running debate about the future evolution of Britain’s energy system. We won’t be moving to zonal pricing.
Instead we’ll retain a reformed version of a single national wholesale electricity market.
“Reformed” here is doing a lot of heavy lifting. What it actually means in practice is that Britain is now only at the start of a lot of work to figure out how to deal with extremely large expected increases in network and balancing costs in the coming years. This is what zonal pricing was intended to address. Now that the government has ruled out that option, an equivalent level of ambitious change is required if consumers are not to see substantial increases in their bills.
Zonal eclipse of the heart
The zonal pricing decision was undoubtedly a difficult one. There was a substantial volume of analysis to support differing directions of travel, with significant savings or costs projected depending on the different sets of underlying assumptions and forecasts. Tough times for the policy folk at DESNZ.
The challenge of predicting what network and generation would be built and by when was tricky enough. Add to that uncertainties around the impact on generators’ cost of capital, how long a lead time to allow to implement zonal, and whether and to what extent compensation would be provided to existing generators for a radical shift in wholesale market conditions.
For Scotland the position was a little clearer. Given the preponderance of generation relative to demand it’s reasonable to assume that consumers in Scotland, particularly those in the north, would have benefitted from a move to zonal pricing, at least in the short term.
Even then, however, the benefits and risks for consumers and communities weren’t completely straightforward. For consumers here, there did appear to be clear potential for cheaper energy, while zonal pricing may have presented an opportunity to attract energy intensive industry to Scotland. But there were also potential downsides. Zonal pricing would have undercut the profitability of Scottish generators, reducing the incentive to build here. It would also have reduced the need for new network. Bad news for our Transmission Owners. And by extension there would have been consequences for jobs and the wider economy, as well as longer term implications for the future of the energy system here.
There were also wider arguments around making the move to zonal now. If you want to install as much renewable generation as you can in the next decade, it’s a risky business making such a big change to the rules of the game in the middle of that sprint. And DESNZ had a queue of generators telling them that they wouldn’t invest amidst this uncertainty.
Zonal recall
So it’s easy to see the reasons why the UK Government felt they couldn’t proceed, even if you don’t agree with the decision. What is less easy to understand is what the alternative option is. The status quo was deemed unacceptable by DESNZ at an early stage of REMA. However, the limited trailing we’ve seen to date of the alternative to zonal looks like a lot like the status quo.
The underlying challenges that zonal pricing was seeking to address are still there. Even in the most ambitious network build scenarios, balancing and constraint costs are forecast to rise substantially. In 2019, total balancing costs were around £1.3bn, last year they were £2.7bn, this year they are expected to be north of £4bn, and by 2030 could hit £8bn or more. So network costs will increase, and so too will balancing costs. For consumers this is not good news.
It’s not all bad news. We can point to other significant changes that were already in train. Like the introduction of NESO’s Strategic Spatial Energy Plan (SSEP), which will, to a large degree, dictate where generators site themselves in future. This should in theory help to make sure that generators are located where they’re most needed, reducing balancing costs over the long term, with subsequent savings to consumer bills.
And the UK government has suggested that changes to both transmission charging and balancing arrangements will be part of their plan for a reformed national electricity market. The former was going to happen anyway, and has been on pause while REMA has been ongoing. Following the zonal pricing decision, Ofgem were quick off the mark to indicate that it was ready to swing into action. A reformed version of TNUoS could provide a more powerful investment signal, forcing generators to bear more of the risks of their siting decisions rather than consumers. There again, what need of a locational investment signal if NESO’s SSEP is telling generators where they can and can’t go in future.
Balancing reform could take many forms, some more meaningful than others in providing operational signals. The early sounds from DESNZ were that they see changes to balancing as something for NESO to take forward. This implies a level of ambition at the more modest end of the spectrum. Would NESO be empowered to move to central dispatch without government support? And if not then we’re talking about trimming rather than cutting costs.
The other obvious option that there is a case to reexamine now that zonal has been ruled out is access reform. If you can’t change the wholesale market rules then change the entitlement to be compensated when generators aren’t generating.
None of this is to say that dispatch or access reform are either easy or obviously the right answer. But, if zonal was tough, then so too are the alternatives.
In the absence of new options then DESNZ should urgently revisit existing ones.
While Consumer Scotland was broadly supportive of zonal pricing, we recognise the reasons why the UK Government chose not to proceed with it. But it’s difficult to see how maintaining the current arrangements, or a marginally different version of them, remains a sustainable position as balancing costs continue to rise and the costs of RIIO-3 start to hit consumers’ energy bills. In that scenario there will be a need to revisit the zonal debate with some urgency.
Sitting uncomfortably alongside all of this discussion about a reformed national wholesale market is a question of fairness for consumers in Scotland, particularly those in the north, who currently pay some of the highest network costs of any region in GB. If it is to remain a national market, how is it fair to say on the one hand that we can’t benefit from the generation facilities here, but on the other that we have to pay extra for the network?
There are no easy answers to any of this, but continuing along our current path is also not sustainable. When the UK Government publishes its plan for a reformed national market later this year we want to see an ambitious set of proposals, even if this means revisiting options that were previously discarded or considered too difficult to achieve. Only by doing so will there be a credible path to lower bills for consumers in Scotland and the rest of GB.