News | Eve Lucas | July 2025
Researchers warn of risks associated with location-based pricing
In the latest Review of Electricity Market Arrangements (REMA), the UK Government officially decided against plans for ‘zonal pricing’ that would have charged electricity users in different regions varying rates based on local supply and demand, opting instead to maintain a single national pricing system.
Proponents of zonal pricing suggested the new scheme could lower energy bills for those in the northern regions of Scotland, where local residents and businesses experience some of the highest levels of fuel poverty and disturbance caused by major energy infrastructure developments. Researchers from the Energy Demand Research Centre (EDRC) – working within the EDRC Equity theme which is led by the Centre for Energy Policy (CEP) – have remarked in a new blog that whilst policy must aim to address fuel poverty in remote areas, “a location-based change in household energy bills could risk entrenching existing inequalities, as those on high incomes in certain regions may benefit more than households on lower incomes in others.”
Resolution to a divisive debate, but equity issues remain
The announcement had drawn mixed reactions from across the energy sector, highlighting the deep divisions that have characterised the debate. Work published by the UK Energy Research Centre (UKERC) in spring 2025 found that zonal pricing carried risks for renewable energy developers who might react by increasing their strike prices in upcoming Contract for Difference (CfD) auctions to offset these dangers – negating any benefits the new pricing scheme would bring. Those who had come out in support of zonal pricing had included the energy system operator NESO and Octopus Energy.
The government's choice to maintain national pricing represents a significant policy decision as the UK works toward its goal of creating a virtually carbon-free power sector by the end of the decade. According to UK Government, the move prioritises system stability and investor confidence over market efficiency mechanisms that supporters argued could have reduced overall costs.
Dr Antonios Katris, Senior Research Fellow at the Centre for Energy Policy (CEP), said: “This decisive action by the UK Government is a welcome development. Strategic clarity will provide essential stability for the renewables sector and underpin the government's ambitious Clean Power by 2030 mission. Given the level of opposition from renewables developers, it would be essential to weight any expected benefits of zonal pricing against the potential risk to necessary investments.
Crucially, while zonal pricing might have delivered lower energy costs for communities in Scotland's most remote regions – areas that bear some of the greatest burden of energy infrastructure and fuel poverty – it could also impose higher costs on households across other parts of the UK. The challenges faced by remote Scottish communities are significant and merit policy attention, but a truly equitable energy system cannot ease fuel poverty in some communities and aggravate it in others. Beyond the immediate distributional concerns, location-based household energy pricing risked exacerbating existing socioeconomic inequalities, potentially advantaging higher-income households in certain regions while disadvantaging lower-income families elsewhere.”
This REMA decision indicates that while zonal pricing could improve grid efficiency by varying electricity prices by region, it posed too many risks for renewable energy investors, who could face volatile and unpredictable returns. With the argument that this approach will accelerate investment, keep costs down for consumers, and deliver benefits more quickly than a complex zonal system, the government will pursue a reformed national pricing model that seeks to retain a single wholesale price across Great Britain, while making it clearer and more predictable where in the country it is most beneficial, both economically and technically, to build and operate electricity infrastructure for the long term.
The decision concludes, at least for now, a protracted industry debate as the UK works toward creating a virtually carbon-free power sector by the end of the decade. However, the issues zonal pricing sought to address are still present and require further policy attention.