Genuine green tariffs under threat from zonal pricing
By Simon Shaw, Regulatory Affairs Manager at Good Energy
It’s not long till the UK government takes the big decision on whether to introduce a zonal or reformed national market as part of the Review of Electricity Market Arrangements (REMA).
The debate on REMA has been loud and divisive, with larger organisations dominating the conversation. This is a problem, as it means the perspectives of organisations who offer a vital route to market for small-scale renewables, are not being equally heard.
Ultimately, we can, and should, reform the electricity market to ensure renewables are being built in the right places and those benefits are being felt by consumers. But we shouldn’t be exposing bill payers to unnecessary costs and risks through zonal pricing, at such a critical part of the energy transition.
Good Energy has a unique view here. We buy all the power we supply to customers directly from renewable generators across the country. This is not the case for the backers of zonal pricing. And it is from this perspective that we have concerns about the prospect of a zonal pricing system.
Many of the arguments for and against zonal pricing have been well rehearsed by now but one area that isn’t getting the attention it deserves is that of consumer choice. Zonal pricing could limit the ability of consumers to actively choose a genuine 100% renewable electricity tariff.
Zonal pricing will make it harder for customers to choose a genuine 100% renewable tariff
The latest indications point to a reduced role for suppliers to contract directly with renewable generators under a zonal pricing system.
It means suppliers, like Good Energy, who contract directly with renewable generators right across the country through our Power Purchase Agreements (PPAs), may be limited to contracting directly with generators within zones.
This could create a situation whereby consumers in certain areas of the country are locked out from accessing 100% PPA backed renewable tariffs, due to there not being a sufficient amount of renewable generation to meet overall customer demand in the zone they are located in.
This would be a devastating outcome for consumers who are currently making an active choice to support the growth of small-scale independent renewable generators, irrespective of where they are located in the country.
Zonal pricing will likely stall investment in clean energy, including small-scale renewables
Breaking up our national electricity market brings significant change, disruption and risk. Investment in renewables hinges on stability.
The risks to investment are also equally applicable to smaller-scale renewable generators. Good Energy’s Power Purchase Agreements offer a route to market for renewables — 40% of the power we supplied customers in the most recent compliance period came from new grid connections. Support for renewables like this may be under threat if the design of a zonal pricing system aims to reduce the ability for suppliers to contract directly with generators.
This would be harmful for all kinds of small-scale renewable generators, including community energy schemes.
With implementation unlikely till the early 2030s, and many of the key design details such as how many zones the country will be divided into yet to be confirmed, this uncertainty presents serious threats to the investability of the sector, for both large and small generators.
Here are some ideas for reforming the electricity market that would help rather than harm renewables and the customers who want to support a greener grid:
Introduce a requirement for energy suppliers to evidence the amount of renewable energy they supply based on energy they have procured, not simply certificates: doing so would deliver increased support for decentralised renewable energy resources, and increased system efficiency as suppliers would be incentivised to optimise their renewable procurement strategies based not only on how much their customers are using, but also when they are using it.
Require energy suppliers to provide a more direct link between renewable energy supply and demand: time-based matching (i.e. matching customer demand to renewable generation, 24/7, 365 days a year) can send effective investment and operational signals for suppliers to procure a diverse mix of renewable technologies, and in the right location. Not only this, but you also get the key benefit of increasing transparency for consumers.
Reform network charging arrangements: we don’t need to divide the country into separate pricing zones to encourage developers to build renewables in areas with grid capacity. Instead, we can reform existing network charging arrangements to deliver strengthened locational investment signals. We should also reform how network charges can deliver improved operational signals to consumers to support with flexibility, as well as options to move the costs away from being levied on the standing charge, as they are currently.
Scale up demand-side flexibility: whilst REMA is principally focused on the supply side, we must not sideline the demand side. An efficient, renewable powered electricity system requires a significant increase in low-carbon flexibility. We need to join up separate industry workstreams and prioritise encouraging the right incentives for large-scale participation in demand side flexibility.
Remove levies on electricity bills: REMA is focused on reforms to wholesale energy markets. However, social and environmental levies continue to sit disproportionately on electricity bills versus gas, proving a major barrier to wider electrification. We should move policy costs off bills into general taxation to lower everyone’s bills.
Reform of our electricity markets is clearly overdue. This is necessary to accelerate decarbonisation of our power system, and we should be aiming to make energy fairer in the process. If we were starting from scratch, zonal pricing may be a good option. But coming from the reality of working with renewables up and down the country, we think that the risks are too great.
