‘Investment hiatus’ fear over plan for regional energy pricing

Plans to introduce regional energy pricing risks heightening uncertainty and pushing up financing costs for the developers of renewable projects, industry experts have warned.

The government has put forward proposals that would increase the cost of energy in parts of the country where demand is greatest and reduce prices where there is ample supply, such as Scotland.

The idea is to incentivise developers to build wind and solar farms closer to where population density is greater, namely London and the south of England.

So-called locational pricing would embed the local value of energy into the wholesale price of electricity, the government said, so it reflects the balance of supply and demand, as well as available network capacity, in each part of the country.

Claire Coutinho, the energy secretary, said: “The whole point of it is that you need less energy infrastructure overall so you’ve got a smaller and more efficient grid, which is why you get savings.”

Every part of the country should get savings, she said, based on the government’s analysis.

National Grid has estimated that five times more power lines must be built by 2030 than have been constructed in the past three decades to carry renewable energy from Scotland to south of the border to meet a jump in electricity demand over the next decade.

The country would be split into smaller regional zones, up to a maximum of 12. The government has said the changes could reduce the cost of running the electricity system and reduce customer bills by between £25 billion and £60 billion between 2030 and 2050, representing a £20 to £45 annual saving for each household.

However, Nick Hibberd, a policy analyst at Renewables UK, an industry body representing renewable energy generators, said regional pricing was “not a silver bullet” and the potential costs of the system could outweigh the benefits. There was a “real risk of an investment hiatus” because of the potentially lengthy period of time it could take to implement the changes.

“Because new local electricity markets would be so much smaller, they’re at greater risk of unpredictable price volatility than the UK as a whole,” he added.

“Investors currently know how the British energy market works, and they understand how to operate within it. Time is of the essence — it is not the right moment to take major risk, particularly when the US and EU are introducing ambitious subsidy policies that are only increasing their attractiveness.”

The added risk could push up financing costs for developers, the industry body warned, pointing to an analysis by LCP Delta, an energy consultancy, and Grant Thornton on behalf of the government.

The analysis suggests that an increase in financing costs of between 0.3 and 0.9 percentage points would wipe out the potential benefit of regional pricing. A 1 percentage point increase would push up costs by between £4 billion and £12 billion and a 2 percentage point rise, between £23 billion and £30 billion.

Martin Pibworth, SSE’s chief commercial officer, said that “clear, consistent and predictable policy” was key to unlocking billions of pounds of investment in Britain’s energy market.

“Any final proposed reforms should pass a simple test: do they speed up investment and delivery?” he said.

The government said that it would need “to fully consider what the impact will be on investors of such a fundamental change to the market” and whether “some of these benefits can also be achieved through modifications to the current national pricing model, particularly the operational efficiency benefits which may not be unique to locational pricing”.