When the Labour government entered office last year, it inherited a complex and politically charged question: how should electricity be priced across Great Britain?
The status quo of pricing electricity nationally, regardless of where it’s generated or consumed, has long been under review. Under the previous government, proposals were tabled to introduce a zonal pricing system, where electricity prices would vary based on a consumer’s proximity to sources of generation. Proponents argued that this could improve grid efficiency, reduce costs, and better incentivise investment in regions where clean energy potential is high but underutilised.
Today, after years of consultation and industry debate, the government has rejected zonal pricing in favour of a more gradual set of reforms. Instead of a radical shake-up, the government will pursue a “reformed national pricing” model under the umbrella of the Review of Electricity Market Arrangements (REMA).
Despite zonal pricing now being off the table, several important reforms are moving forward:
1. A Strategic Spatial Energy Plan by 2026
A centralised plan will guide where new generation and infrastructure projects should be located across Great Britain, offering more predictability for project developers.
2. Reformed Network Charging
Updates to how generators are charged for accessing the transmission network, which could make it cheaper to build new projects closer to demand centres.
3. Faster Grid Build-Out and Constraint Cost Reductions
The government is targeting a 50% reduction in constraint costs (payments made to turn off generators due to grid limitations) by 2030, critical for unlocking more renewables.
❌ No Decoupling from Gas Prices
While Contracts for Difference (CfDs) and similar mechanisms already protect many renewable generators and help reduce exposure to gas price volatility, the system overall continues to set electricity prices based on the marginal cost of gas. A broader shift toward structural decoupling, such as splitting markets or redesigning wholesale pricing, has not yet been taken forward.❌ No Fundamental Reform of Pricing Mechanisms
Although incremental improvements will be made, the government has not opted for a full redesign of the electricity pricing system.
The government’s decision prioritises stability over disruption. For cleantech innovators and investors, this has mixed implications.
1. Policy Certainty: By rejecting zonal pricing, the government removes a major source of uncertainty that was holding up investment decisions, especially for large infrastructure projects.
2. Grid Efficiency Gains: Commitments to faster grid build-out and reduced constraint payments are welcome news for renewable energy developers frustrated by delays and curtailment.
1. Missed Opportunity for System Optimisation: Many in the sector had hoped zonal pricing would send clearer locational signals to developers and reduce inefficient network use. The decision to stick with a national model may limit the UK’s ability to fully optimise its energy system.
2. Slow Decarbonisation of Pricing: Without decoupling from gas, electricity consumers will continue to feel the volatility of fossil fuel markets - even as the system gets cleaner.
3. Partial Progress on Decoupling: The government’s decision not to pursue more fundamental reforms means the electricity market remains linked to fossil fuel price spikes in important ways. While CfDs provide some insulation and are likely to expand, this approach stops short of the more systemic decoupling that Cleantech for UK and others have called for. We have consistently advocated for reforms that would better reflect the falling cost of renewables in consumer bills and reduce reliance on gas-driven price signals.
The UK’s electricity market urgently needs to evolve to meet the energy trilemma: achieving net zero, ensuring energy security, and keeping costs affordable for consumers. Today’s announcement signals that the government is choosing an incremental path, aiming to improve the system within existing structures rather than overhauling it. This is a defensible strategy, that prioritises evolution rather than revolution. But it comes with risks. Without bolder reform, the UK could fall behind in creating the kind of dynamic, low-cost, renewables-led energy system that many in the cleantech community believe is both necessary and possible.
The coming years, particularly the period between now and 2026, will be critical. Much hinges on how effectively the Strategic Spatial Energy Plan is developed and implemented, and whether reforms to network charging and grid build-out can unlock the scale of clean infrastructure needed.
For cleantech founders, investors, and policymakers alike, the message is clear: there’s now a bit more certainty, but also a lot more work to do. Cleantech for UK will continue to work across departments to continue to shape this evolving and complex challenge.
