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Implementing complex and costly projects that require collective action is always a challenge. The same goes for the energy transition. UK voters are starting to experience “climate fatigue,” which calls for a response from policymakers. They need to find ways to decrease the overall cost of the transition and provide consumers with opportunities to reduce their own bills.
It’s not surprising that the concept of achieving net zero emissions is losing popularity. While the country has made progress in decarbonizing its energy system and promoting cleaner electricity, this has come at a cost. Approximately 40% of the typical energy bill is allocated to cover policy and network expenses, which burden all consumers.
In a time when customers are already facing financial pressure from higher mortgages and food inflation, politicians find themselves in a difficult position. In fact, after the recent by-elections, leading members of the Conservative Party are urging Premier Rishi Sunak to reconsider expensive climate targets in the hopes of gaining more votes.
One potential solution is to make the energy transition less burdensome. The government’s ongoing Review of Electricity Market Arrangements (REMA) presents an opportunity to accomplish this. A key proposal in the review is the shift from a single national electricity price to locational marginal pricing (LMP). Under LMP, the price would vary by region, based on the specific production and delivery costs of electricity in that area.
The current national electricity price in the UK is a convenient but unrealistic assumption that electricity can be easily transported from any generation source to where it is needed. In reality, grid constraints often result in wasted renewable power in certain regions, while expensive gas-fired power plants have to be activated to meet demand in other areas.
The system relies on the National Grid to keep it balanced. Wind farms are paid not to generate electricity when there is excess supply, while gas-fired plants receive compensation in the southern regions. The costs of balancing and dispatching activities are shared among all consumers, and as the transition progresses, these costs are expected to increase due to necessary grid investments and the resulting time lag.
Locational pricing would divide the UK into zones that reflect the grid constraints. Each zone would have its own electricity price, determined by the marginal cost of electricity in that particular area. During periods of surplus power, prices in different zones would converge. However, when Scotland produces more wind power than it can use or export, prices in its zone would decrease to the point where generating electricity becomes economically unviable.
“The value of energy is increasingly specific to time and place,” explains Dan Monzani, an energy consultant at Aurora. “Pricing that reflects this value would, at least in theory, encourage new generators and consumers to make strategic decisions about their locations.” For example, wind farms might choose to be closer to areas with high demand, while data centers could opt for Scotland due to its low electricity prices. This approach would reduce the need for extensive network investments, decrease curtailments, and support the government’s agenda of leveling up different regions.
However, there are other factors to consider. As Monzani points out, the current location of offshore wind farms is determined by central seabed leasing and network planning, which could limit their relocation in the short term.
Critics worry that implementing such a system would create unnecessary complexity without significant benefits. Additionally, new wind farms might face higher capital costs due to volatile revenues, which would negate some of the advantages of LMP.
However, relocating is not the only way to take advantage of price signals. By combining LMP with smart meters and half-hourly prices, consumers, particularly those in high-cost areas, would have a strong incentive to use energy more efficiently. They could save on their bills by running appliances like washing machines and electric vehicles during periods of low electricity prices. This would also reduce the need for network investments. “We need innovative retail models that empower consumers to save money by using energy during non-congested periods,” says Ben Shafran from Energy Systems Catapult, a non-profit consultancy.
Perhaps the most valuable aspect of introducing price signals is the potential for unanticipated solutions and technologies. Markets often excel at generating ideas that were not initially considered. Of course, this approach carries risks, just as relying on a centrally planned pathway to net zero does. As the growing climate fatigue reminds us, a successful transition depends on keeping customers engaged and supportive.
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