RWE chief slams 'totally irresponsible' argument for UK zonal price switch

A proposed UK move to zonal pricing comes at the wrong time as the switch would jeopardise the country's clean power targets and rests on a “totally irresponsible” argument, said RWE CEO Markus Krebber.

German utility RWE, one of the UK’s largest power generators, has argued vociferously against a proposal to dramatically reform the UK power market by moving from a single nationwide electricity price to one set zonally.

The Labour government is currently considering the idea and is due to make a decision soon, possibly even next month. Such a switch would have huge implications not just for current UK power assets but also the development of new renewables capacity.

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; and encouraging renewables developers to build new capacity where it is most needed.

“Every system has its advantages and disadvantages" but debating a switch to zonal pricing “is not the right discussion,” said Krebber, speaking at the Aurora Spring Forum summit in London today.

“Because the right discussion is, what do we need to do today to solve the problems we face?”

“Implementing a totally new market design system like that overnight,” when there are billions in investment needed to roll out renewables, would come at the "wrong time,” said Krebber – regardless of the merits of that system.

The government might say “we’re going to ringfence A and we’re going to protect B,” but Krebber said that is simply a route back to the old system while overcomplicating it. Stability is what is “most important” today.

Krebber said that a similar analysis has been carried out of his home German market, which he said is facing “bigger problems” than the UK. The outcome was that, while it might save consumers in the order of €300m annually, it also has the disadvantage of “destroying investor confidence, losing market liquidity.”

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

Renewables and transmission capacity is built in a “competitive environment,” he said, and investment only happens “when, in the end, somebody pays for it.” Ultimately, he said, that somebody is the consumer.

“So just changing the system might change the incentives, but the total cost will not go down. And when the total costs don't go down, you cannot lower consumer prices. You might have a different distribution. Some pay less, some others pay more.”

Pressed by an audience member on when a good moment might be to introduce zonal pricing, Krebber said he doubted there would “ever be the right time.”

“Because the negative aspects of exchanging from one system to the other are tremendous.”

The Labour government’s decision on whether to switch to zonal pricing comes as it gears up for its next annual renewable energy auction. There is massive pressure on the government to deliver a blockbuster round, particularly for offshore wind.

The government wants to deploy 43-50GW of offshore wind in UK waters by 2030, up from around 15GW today. RWE has argued that introducing huge uncertainty on the eve of the auction round would inevitably push up bid prices from developers wanting to insulate themselves.

Martin Pibworth, CEO designate of UK developer SSE, who was also speaking on the panel, said that the UK has been “incredibly successful” in its development of offshore wind despite market challenges, with its Contracts for Difference system “visionary” in its time.

Many of the challenges that zonal pricing looks to address could, he said, be addressed by speeding up the buildout of new grid infrastructure to help distribute clean power around the UK more efficiently.

But, in regards to zonal pricing reform, he called for the government not to “introduce unnecessary risk into quite stable systems," which would disrupt appetite to built out infrastructure.

“Even if the government decided today they wanted to do it, I don't think it's a particularly easy thing to do, and I don't think it comes particularly quickly.”