The Department for Energy Security and Net Zero (DESNZ) has not yet set out its analysis showing how zonal pricing might impact energy intensive industries to make an informed decision on whether to introduce it. Without such analysis, it would be irresponsible to make a decision on the future electricity market arrangements. The Department should appraise the potential impact of zonal pricing and a package of national market reforms before making a policy decision.
Key questions that an appraisal of the impact of zonal pricing should answer are:
What are the likely estimates of average wholesale electricity price impacts per zone up to 2050?
What might the market liquidity and wholesale electricity price volatility be in the different zones?
What are the likely impact on network charges and retail electricity prices for the archetypes of energy intensive industries, as identified, in the different zones?
What might the impact be of likely changes to the zonal electricity wholesale prices and network charges on the network charging compensation scheme?
What might the impact be of zonal pricing on the scheme to exempt certain energy intensive industries from the capacity mechanism?
What are the legal and administrative considerations of any options to shield existing large demand assets from locational signals under zonal pricing look like?
What are the cost and benefits of excluding demand from zonal pricing?
DESNZ should also appraise these questions in relation to likely impacts of a reformed national market package. Without a proper assessment of how both of them might impact energy intensive industries, this lack of clarity is increasing investor uncertainty at a time when these industries are under increasing competitive pressure, mainly due to higher UK energy prices.
DESNZ should assess the impacts of zonal pricing and a package of national market reforms before making a policy decision.