Benefits of zonal pricing will be limited before 2035

The biggest benefits of zonal power pricing will not materialise for at least decade, consultancy Afry has claimed.

Afry’s new report warns that “significant delivery challenges” of rolling out zonal pricing would limit the “scope for any potential benefits to be realised before 2035”.

However, the consultancy’s study backs zonal pricing as offering greater scope than other mooted wholesale market reform options to improve the grid’s operational efficiency.

The study, published by consultancy Afry, examines various options for national and zonal electricity systems for Great Britain.

The government’s second REMA (review of electricity market arrangements) consultation, published in March, ruled out further consideration of nodal local marginal pricing (LMP), which would involve breaking-up the wholesale market.

However the consultation, which closed for feedback this week, keeps zonal LMP pricing on the table alongside less radical proposals for improving operational incentives within the national electricity market. In addition, the REMA paper said the government would give ‘further’ consideration to moving to a centralised dispatch market.

The Afry study says that a move to zonal markets could provide the “greatest improvement” to the grid’s operational efficiency, provided zones can be defined that capture the main current and future constraints on the transmission network.

However, it says this relative improvement would be lessened if the lag in network build could be reduced, while moving to both zonal markets and centralised dispatch would raise new investment risks.

These include a lessening of market liquidity and increased scope for local players to flex their muscles within each zone’s smaller markets, together with potential impacts on cost of capital due to exposure to more volatile and less predictable zonal prices.

In addition, both zonal markets and centralised dispatch would face “significant deliverability challenges… limiting the scope for any potential benefits to be realised before 2035”.

A decentralised zonal market would be the best enduring solution, once associated implementation challenges have been overcome.

But a zonal market should only be implemented if accompanied by an extensive risk management framework and ‘grandfathering’ of existing rights.

If these pre-conditions for implementing the zonal market cannot be delivered, the best alternative would be REMA’s other key option of improved investment and operational signals within the existing national market framework, combined with a “strong focus on delivering appropriate levels of transmission reinforcement”, it says.