Octopus chief claims zonal pricing can fix 'Soviet' UK power system

Switching to a zonal pricing system offers an “elegant” mechanism to make markets more responsive to supply and demand, and should replace a current UK system that is as out of touch as a Soviet-era state planning committee, the CEO of utility Octopus Energy claimed.

The UK’s current Labour government has floated the idea of a dramatic switch from a single nationwide electricity price to one set zonally depending on levels of supply and demand.

Proponents of the idea say that it would help resolve current regional imbalances in supply and demand – encouraging large power offtakers to set up shop where there is abundant wind and solar generation, or green power developers to build near demand centres.

They also question whether the proposed reform will actually bring down power prices on a net basis.

Octopus boss Greg Jackson, one of the measure's most vocal advocates, told an audience at this week's Aurora Spring Forum event in London that the proposed zonal pricing reform could work wonders.

"I hear complaints from a lot of large generators about all the risks they and the challenges they face. At the same time, you have consumers and businesses complaining about energy costs,” he mused.

“Fundamentally, both sides are complaining and that tells you something is broken.”

Pressing this point further he said the UK has paid £430m ($578m) in CfD curtailments so this year while grid-scale battery systems “spend 30% or 40% of their time fighting themselves".

“These should all be taken as signs that something is wrong. And I think what's happening is that we haven't adjusted market mechanisms and the incentives to match the technology change, which is now so huge."

Jackson advocated zonal pricing as “probably the simplest, most elegant mechanism for providing the right price signals for infrastructure, assets and interconnectors... for operators to operate at the right time and for investors to build in the right places”.

He predicted that the change could create system-wide efficiencies and provide the UK with savings of £4-$7bn per year.

"The Soviet Union collapsed because the central planning authority Gosplan couldn't manage supply and demand... they couldn't keep their economy going," he said.

"We are in a capitalist system ... but honestly, sometimes the energy system in the UK, feels to me more like Gosplan than a market economy."

Jackson said a pricing mechanism that can lower prices in a renewables-rich region can also play a vital role in social acceptance.

“You get a system that brings cost down for industry and for consumers, which means we get the social support that we need to carry on the journey we've just begun,” he said.

“I think what we're seeing around Europe, and obviously in other parts of the world, is transitions that are crossing a multilane highway… the last thing you want to do when you cross a multilane highway is stop and hesitate.

“We need to give people the confidence to get to the other side, which we all know will be lower cost, cleaner, will be better for our planet.”

'No miracles' rebuttal

Jackson was speaking shortly after RWE CEO Markus Krebber rounded on the zonal pricing proposals as mistimed and potentially jeopardising the UK’s 2030 clean power targets.

Claims that zonal pricing will “by a miracle lower consumer prices are totally irresponsible,” Krebber fired.

Critics have also warned that uncertainty over whether or not the government will go ahead with the zonal pricing reform is starting to impact the schedule of the AR7 allocation round.

AR7 is scheduled to take place this year, but the process has not been finalised and officially opened yet, which means it is running at least one month behind where the AR6 round was last year.

The Labour government is still currently considering the idea and is expected to make a decision soon.

But Jackson was not in favour of deferring to a late date or following the prescription of fellow panelist to "evolve the market rather than revolutionise it".

"If you tell a householder of the amount of the money on their bill going towards paying for new wind farms, but tell them this is curtailed 71% of the time, this is indefensible.

"We've had to learn and discover that these issues occur. But if we don't react to them, and don't act upon that learning by becoming more efficient, then support will absolutely plummet... you can't have a narrative that's not based on the truth," he warned.

“We need to give people confidence by making changes now that in the next half of the journey are going to deliver results.”