Zonal pricing would mean a postcode lottery for energy
Anyone with a a serious interest in building, making or investing anything in Britain knows that creating a postcode lottery for energy prices will lead to uncertainty and higher prices for consumers, says Alistair Phillips-Davies
Since Labour took office, a central question has emerged: can it reduce household energy bills by £300 and deliver the investment needed to meet its clean power mission by 2030?
This tension between short-term affordability and long-term ambition is nothing new in the energy sector. I’ve seen it play out many times during my 12 years as Chief Executive of SSE – but never with the stakes so high or the choices so stark.
Governments have limited control over energy prices in the near term. Yet the temptation to let short-term politics override long-term strategy is ever-present. And when prices rise, it’s often decarbonisation that gets the blame – when in truth, it’s wholesale gas prices that are the real culprit. In fact, renewables already help mitigate high gas prices.
The good news is that bills are forecast to fall. Cornwall Insight forecasts a £129 drop in the energy price cap from July. Our own modelling suggests that, under moderate assumptions, bills could fall by more than £300 by 2029 versus pre-election levels – which should ease the short-term political pressure and give households a much-needed reprieve.
The bad news? In a system still largely reliant on gas, history shows that the wholesale price will rise again and, with it, bills.
So the real question is: how can we use this opportunity over the next few years to get off what the Prime Minister recently called the “rollercoaster of international fossil fuel markets”?
Fortunately, the government has a plan. A clean power plan, in fact, to build the infrastructure needed to harness more of our abundant homegrown energy, move it efficiently across the country, and back it up with lower-carbon generation when the wind doesn’t blow and the sun doesn’t shine.
Removing barriers to investment
But delivering that plan won’t be easy. It demands clarity, a relentless focus on removing barriers to investment, and – above all – calm, steady leadership. The coming months will be a test for policymakers and regulators, with three big decisions looming large.
Firstly, the government is considering ‘zonal pricing’ – a fundamental change to the UK electricity market which is one of the remaining options on the table following a market review kicked off by the previous government. We’ve been clear, as has anyone with a serious interest in building, making or investing in anything in this country: this would be a huge mistake. It risks creating a postcode lottery, where some households would pay £200–£300 more simply because of where they live. It would inject more than five years of uncertainty, raise the risks and costs of investments, and ultimately leave us more exposed to gas prices for longer. Ruling it out would generate an immediate boost to investment.
Zonal pricing would mean some households would pay £200–£300 more simply because of where they live. It would inject more than five years of uncertainty, raise the risks and costs of investments, and ultimately leave us more exposed to gas prices for longer
Secondly, the next auction round for offshore wind is critical. It must succeed if we’re to protect ourselves by tapping into more of our natural homegrown energy supplies. But uncertainty around zonal pricing and the investment climate still clouds the outlook, spooking developers.
And thirdly, Ofgem is about to decide how much electricity network operators like SSE can invest in the UK’s transmission grid – another critical enabler of our energy independence. That decision will shape the pace and scale of electrification, and signal to investors whether the UK is serious about growth. Investing more in the near term will unlock far bigger savings in the long run – but again requires longer-term vision.
The conclusions from the UK-EU Summit this week, including linking of the UK and EU Emissions Trading Schemes, demonstrate that the government is prepared to be bold to give businesses and industry long-term clarity and confidence. As do efforts to streamline the planning system to unblock investments in grids and renewables.
With a potentially more benign period ahead for wholesale prices, this is the time for calm heads and strong leadership. There will be bumps in the road, but if we stay the course the benefits will be felt for decades to come. In a world of short-termism and increasing polarisation, this is easier said than done. But keep the pace high and the risk low, and we can transform our energy system and deliver lower bills that stay low – and that’s one ambition that all parties can get behind.
Alistair Phillips-Davies is the outgoing chief executive of SSE plc, the UK’s clean power champion.