Local electricity pricing can power UK to net zero

Local electricity pricing can provide the foundations for a truly smart energy system and deliver substantial cost savings for customers, according to Policy Exchange.

On 7 December, the think tank published a report, Powering Net Zero, where it warned cost rises during the summer coronavirus lockdown – system balancing costs rose two-thirds (£220mn) on the same period in 2019 – could become the new normal without reform. With the UK on the cusp of a clean energy revolution, underpinned by the government’s 40GW offshore wind commitment, it called for local electricity pricing to be introduced to take full advantage of the UK’s offshore wind potential and bring down costs.

This would see electricity prices to vary across the country, based on local supply and demand. It could reduce system costs by £2.1bn per year, or £37 per household, based on Aurora Energy Research modelling, means if implemented by 2026, customers would save £50bn by 2050. Lower local energy prices could also act as a catalyst for the UK’s green manufacturing sector in places such as Aberdeen, Grangemouth, Teesside, Humberside, Merseyside, East Anglia and South Wales.

The report further made the case for the government’s main schemes to support renewables projects and keep the lights on to be evolved as well to keep the UK on track to reaching net zero. It made a series of recommendations* on how to do this, such as calling for the Contracts for Difference (CfD) scheme to offer a simplified floor-price CfD to encourage developers to build projects in places that reduce costs for consumers, and reforming the Capacity Market (CM) to include a low carbon quota.

Policy Exchange

*Policy Exchange’s 15 policy recommendations were grouped into three key themes:

  • Introduce local electricity pricing in Great Britain:
    • Government should introduce local pricing in the GB wholesale electricity market, modelling on US markets such as Texas.
    • Residential and small business customers should be charged a regional electricity price, initially, unless they opt in to local pricing. Government should aim to extend local pricing to all customers over time.
    • Government should offset differences in electricity prices in different regions of Britain using fixed credits and charges on customer bills. This should apply to residential and small business customers only.
    • Local pricing in the GB electricity market should start in April 2026.
  • The CfD scheme should offer a simplified “floor-price” CfD:
    • Government should amend the CfD scheme to offer generators a guaranteed annual minimum payment, based on approaches used in Spain.
    • CfD auctions should be held annually, at the same time as Capacity Market auctions, making it easier to combine the pair in future.
    • Project developers should be required to submit bid bonds when entering the CfD auction, as they do in the Capacity Market, to help ensure clean energy projects are delivered.
    • Existing renewable energy generators should be allowed to compete for 1-year CfDs once their existing contracts end, ensuring existing generators are not decommissioned prematurely.
    • Government should radically simplify the CfD scheme by scrapping Delivery Years and price caps for established technologies, and by allowing project developers to nominate their own “load factor”.
    • The CfD auction planned for 2021 should be the last held under current rules, with the first CfD auction or floor-price CfDs held in Q4 2023.
  • The Capacity Market (CM) should include a “low-carbon quota”:
    • The CM should include a low-carbon quota for firm low-carbon resources, with the quota growing over time to increase participation of low-carbon generators.
    • Government should allow firm low-carbon resources to receive contracts in both the CM and CfD scheme.
    • Government should amend the CM to include regional capacity pricing, modelled on markets like New York State.
    • Government should introduce a stricter testing regime and higher penalties for non-delivery in the GB CM.
    • The first CM auction including a low-carbon quota should be the T-4 auction for 2027/28, held in Q4 2023.