The aim of electricity market reform is to benefit consumers, yet the design of markets barely considers them, let alone the distributional impact on the fuel poor and key industries. Here, Regen director Johnny Gowdy considers how shifting to an electricity market based on zonal pricing may impact consumers and how they might respond to more volatile, transient and diverse prices. He concludes that taking an overly techno-economic approach risks missing the distributional and societal impacts of market reform and calls for a full evaluation of consumer impacts and public acceptance before deciding to opt for zonal pricing.
Government ministers are considering a key decision point in the GB Review of Electricity Market Arrangements (REMA), whether to opt for a market redesign in the form of zonal pricing or implement progressive reforms within the national market.
This is not an easy decision, and opinions are divided. The benefit models offer uncertain and conflicting results. Either choice presents challenges, but a decision to opt for zonal pricing will entail a major upheaval of the current market and a five- to seven-year implementation period, bringing increased risk for investment and potentially very divisive outcomes for consumers.
Critical to this decision is a judgement of whether zonal market reform will bring sufficient consumer benefits and, in a broader sense, whether consumers will judge the reforms as sustainable, fair and politically acceptable. Getting this wrong could provoke a backlash which, in the context of the increasingly hostile politics of net zero, could undermine the government’s clean power mission.
Given the importance to address the UK rising electricity bills, it is surprising that the current market reform process has given little consideration to actual consumers, both domestic and industry, and how they will likely respond to a zonal pricing market with more volatile, transient and diverse prices between zones and consumer groups.
The analysis so far has focused on whether there is a modelled economic gain for consumers. Theoretical modelling has produced a range of results, from zero or even negative benefits to billions per year, depending on the modelling assumptions and scenarios used, and the extent to which any increased operational and investment costs of zonal pricing are included. DESNZ has not yet published its own modelling and impact assessments. However, it is clear that reliance on disputed model outcomes, that do not fully capture the counterfactual of progressive reform or the distributional impacts of volatile prices, would not be a solid basis on which to make a decision that could profoundly change the GB electricity market and bring with it significant investment and consumer risk.
In this insight piece, we identify consumer impacts that ministers should be considering. These include:
The timing, scale and robustness of the benefit case and whether the benefit potential for consumers is really a game-changer for electricity bills.
Disappointment that may arise when consumers understand that zonal pricing does not equate to local energy pricing for high-generation areas, such as Wales, but is driven by the occurrence of grid constraints, which are transient and largely a result of grid investment decisions.
Variable distribution of benefits/costs between zones and consumer groups, and whether this will be perceived as fair and equitable.
Distributional impacts, especially for the fuel poor and within key business sectors.
Resentment from consumers in higher price zones if they perceive that they are subsidising (e.g. via CfD payments) lower-cost energy generators in lower price zones.
The likelihood that zonal prices will fluctuate quite rapidly as the energy transition progresses, and how consumers may respond to unpredictable price changes.
Recent experiences in Norway and Sweden, where zonal price differences (partly caused by cross-border market integration) are having a significant political impact and, in Norway’s case, have resulted in a very rapid shift to a national retail price.
The complexity and unintended consequences of introducing shielding measures to try to mitigate the consumer impacts listed above, which could distort the market, create additional policy risks and elicit further negative consumer reactions.
We conclude that, whatever way they are measured, the zonal pricing benefits presented to date are modest in value, both in the context of overall bill costs and set against the inherent risks of radical market reform. However, there is a high likelihood of a consumer backlash, which would have political ramifications for net zero and the government’s overall energy policy.
Crucially, we recommend that a full evaluation of consumer impacts and their likely response is needed before a decision to pursue zonal pricing. This assessment must go beyond a simple techno-economic analysis of net benefit value to consider public reaction to unpredictable and changeable zonal prices that may be considered unfair.
Is the zonal benefit case worth it? The modelled savings presented are contested and modest when compared to the overall energy bill.
Several studies have been conducted attempting to quantify the benefits of a shift to zonal pricing. This is difficult modelling which relies on making speculative assumptions about the future energy market and using scenarios to model how we might build network infrastructure and new generation along with changes in demand.
These models have struggled to develop a counter-factual of how a reformed national market would perform, so most have assumed a continuation of today’s current market, rather than comparing two reform options. Incorporating the ideal but unrealistic model assumptions of perfect foresight, perfect competition and marginal cost pricing, none of the models has been able to fully include costs associated with an increase in investment risk, or the costs of providing sufficient revenue protection to secure future investment.
Despite these limitations, model results have been presented in the media and elsewhere in the fractious zonal pricing debate as forecasts or predictions of benefits that will certainly occur. In reality, the most that these models can provide is an illustration of the scale of benefits and point to key factors and policy decisions that underpin the case for change. However, even the most optimistic modelled benefits, which project potential savings of tens of billions of pounds over twenty years, would not represent a game-changer in reducing consumer bills, even if these savings were passed evenly to all consumers.
As an example, taking the most recent FTI modelled result of £25.2 billion net system/societal savings over 20 years from 2030 to 2050, an average of £1.26 billion per year, spread evenly across all consumers, results in a saving of c. £4.66 per MWh of current demand, or a saving of £14 for the average 3 MWh current demand household.1
Making the optimistic assumption that consumers gain very significant additional constraint value transfers and congestion rents2 from producers, to increase benefits to £55 billion over 20 years, bumps the benefit case to £2.7 billion per year, around £31 per household per year if applied evenly across current demand.
These benefits are not insignificant, but they are not a game-changer in the context of higher bills caused principally by the rise in gas prices, or the target to reduce bills by £300 per year by 2030. They are also highly contested. Other models using different assumptions produce significantly lower results, down to zero benefits or even negative benefits, as seen in Table 1.3,4,5
Table 1. Zonal pricing modelled benefits over 20 years showing a wide range of outcomes per household.
As Table 1 shows, ministers must consider that the modelled benefits are not huge and they are highly uncertain. Any benefits would not, in any case, kick in until zonal pricing is implemented sometime in the early 2030s, after the next general election. Whether the delayed implementation is viewed as politically positive or negative is a matter for politicians, but it would certainly not bring relief to domestic bill payers or GB businesses in the near term.
Without market intervention, zonal benefits will not be evenly and fairly distributed between consumer groups and regions
Given the importance of the consumer response to new market designs and the objective to make markets more ‘consumer centric’, it is surprising how little analysis and consideration has been given to understand how zonal prices will manifest themselves and what impact they may have between different consumer groups across different zones.
Most of the discussion has focused on the simplistic and contested analysis of whether there is any net consumer benefit. However, the assumption that a net benefit gain will ensure that all consumers are happy to support reform is misleading because:
The net benefit is measured in aggregate across all demand, but does not necessarily mean a gain for all consumers or even for the ‘average’ consumer.
Any nominal gain may not be perceived as a real gain if there is a very wide discrepancy between different zones and consumer groups.
Without some form of shielding (levelling of consumer prices), the benefits would very likely accrue to consumers within zones that are most heavily generation-constrained, and to flexible demand consumers (e.g. EV and battery owners, some forms of commercial demand) with access to better forecasting and smart technologies, who can take advantage of more volatile prices. A significant portion of any benefits could also be captured by energy retailers, traders, IT service providers, hedge funders, vertically integrated energy companies, the system operator and other intermediaries.
Zonal pricing is therefore very likely to be considered unfair, especially given the socialisation of other costs such as renewable generation subsidies and network upgrades which are paid by all consumers.
Zonal price differences may adversely affect the fuel poor and consumers with less flexibility, including key industry sectors
Distributional impacts of zonal pricing have not been presented. The fuel poor, especially those using direct electric heating with inflexible demand, are likely to benefit least and could see higher bills, especially in zones where marginal generation is most often provided by a higher-cost fossil fuel or low-carbon dispatchable generation.
Some consumers could also be disadvantaged because, although located in a zone with periodic low prices, they are unable to take advantage because their area is subject to constraints on the distribution and low-voltage networks. There is even the potential that distribution network charges (DUoS), or some other local price mechanism, may have to become more pointed to send a counter-price signal to dissuade consumers from responding to very low zonal prices.
The divergence of prices between zones and consumer groups is the most obvious political risk that ministers must consider. Within that assessment, ministers need to consider whether there would be undesirable impacts on specific consumer types, the fuel poor being a clear example, and critical industries and areas targeted for new industries and economic growth.
Concern that zonal pricing will adversely affect key industries has been expressed in recent letters from trade unions industry groups including UK Steel.6
Wholesale prices go up on average – but there will be a significant variance between zones
In all the models, wholesale commodity prices increase on average. The claimed zonal benefit is, then, the result of wider system operational efficiencies and the assumed distribution of congestion rents. This may seem surprising, given how zonal pricing has been presented as a way to buy cheaper local energy, but it is the result of having multiple smaller markets, with the marginal price now being set at the zonal rather than national level.
Proponents have argued that the zonal marginal price is more accurate, reflecting the level of network constraint. However, there is also an argument that costs could increase even more than those modelled, owing to a loss of liquidity and other sources of market power, especially in zones whose marginal price is set by thermal generation.
The models produced by FTI and LCP Delta give a high-level analysis showing the overall impact of zonal pricing on wholesale prices across the GB zones.
LCP Delta’s 2025 zonal model (see Figure 1) shows that, compared to a national market average, zonal wholesale prices in 2035 are around £10 per MWh higher along the south coast of England and around £7-8 lower in the north of Scotland. Wholesale prices are around £5 per MWh higher across England and Wales.
To deliver aggregate consumer benefits, the increased wholesale prices must be offset by system cost savings and, potentially, value transfers from producers to consumers.
Figure 1. LCP Delta, Zonal Pricing in Great Britain, 2025 – Differences in regional wholesale electricity prices in 2035.
FTI’s 2025 zonal model also shows an overall increase in wholesale prices of £34.7 billion (present value, 2030-2050) under a zonal model.7 FTI’s analysis also shows a strong north-south division, although by 2035, the FTI model shows lower wholesale prices across the north of England as well as Scotland.7 Again, as with LCP Delta’s modelling, this is an illustrative result of a particular scenario and set of assumptions that does not necessarily represent how the net zero energy system would be built in reality.
Zonal price differences are the result of transmission constraints, not location per se or simple proximity to generation
A common misperception, encouraged by some misleading soundbites, is that zonal pricing equates to local energy procurement and will allow consumers who are located near generation to enjoy lower prices.
In reality, zonal pricing is driven by network constraints, not proximity to generation per se. A customer could be located next to a wind farm or nuclear power plant and not enjoy lower prices if that energy flows unconstrained to other zones, or via interconnectors to neighbouring markets. It is the occurrence of network constraints within areas of high (renewable) energy that causes zonal prices to plummet to near zero (the marginal cost of wind and solar) during constraint periods.
In some media reports, zonal pricing has been described as a postcode lottery. In fact, the ‘lottery’ critique should refer more to the happenstance of network capacity and investment, over which consumers have very little control or foresight. This is an important point that must be considered when assessing how consumers will respond to zonal price differences and whether they will perceive prices as ‘fair’.
At the moment constraints are most prevalent in Scotland, in particular above the B4 transmission boundary in the north of Scotland. If zonal pricing were implemented today, consumers in these areas would experience extremely low zonal wholesale prices for prolonged periods, until network upgrades are made. Consumers further south, even in areas of high generation, would not see low prices if their zonal boundaries remain unconstrained and could see higher wholesale prices compared to the national average.
South Wales is a good example of this.8 With high generation, but relatively unconstrained transmission boundaries with central England and London, zonal prices in south Wales would be set by the marginal generator across central GB, which would often be higher-cost gas power stations. Hence, south Wales is normally modelled within a much larger central GB zone. Similarly, north Wales is normally modelled as part of a northern England zone.
Zonal boundaries should not be political. Redrawing the zonal lines to put south Wales in a separate zone would be purely cosmetic, since zonal price setting in a competitive market would continue to adhere to the transmission constraint boundaries.
Sudden changes in zonal prices will bring additional consumer anxiety and political risk – learning from Norway and Sweden
Constraints will change, and so will zonal prices. This is especially true as GB goes through the energy transition, building more generation, more transition capacity, new interconnectors, and potentially seeing significant shifts in demand. This creates greater risk for investors, but it also creates the strong possibility that, over a relatively short period, consumers could see a significant change in their zonal price.
If consumers are likely to respond negatively to what they perceive to be unfair price differences caused by constraints, they will also respond negatively to sudden changes in energy prices caused by other factors largely outside their control. One can imagine consumers campaigning against network or interconnector investment on the basis that they will ‘steal’ their low-cost energy.
The level of constraint change, and unpredictable zonal prices, also challenges the claim that zonal pricing may attract high energy demand industries (such as data centres) to a particular zone.
Figure 2. Norwegian and Swedish bidding zones. Source: Svenksa Kraftnat
The rapid change in prices caused by an investment in new interconnectors, as well as the divergence between zones, has been a key trigger for a public backlash in Norway. After years of relatively benign zonal pricing9 – well-balanced zones and relatively cheap hydropower energy – Norwegian politicians have been overwhelmed by a backlash due to increases in prices in the two southern zones caused by the construction of two interconnectors (to GB and Denmark), and the recent gas price increase.
As a result, the ruling party has moved to introduce a national retail electricity price, subsidised through taxation. Whether this is the right policy response or not, the lesson here is that the energy transition will bring change, and that changes which result in sudden price movements, especially those which adversely affect some consumers but not others, will not be tolerated.
The reaction to zonal price differences in Sweden – where price differentials between southern and northern zones began to increase in 2020, rose dramatically during the energy crisis period of 2021/22 and have remained high – has not been as extreme as in Norway, but did result in an intervention by the Swedish government to subsidise southern zone energy bills by around €2.6bn.10,11
Mechanisms to shield consumers from zonal price differences may be more complex and divisive than policymakers think
The response from proponents of zonal pricing to concerns about the fairness and distributional impacts of zonal pricing has been to point out that customers may be shielded from zonal price differences, as is currently the case in Italy and will soon be in Norway.
However, neither the Italian nor the Norwegian solution may be appropriate for the GB market. In Italy’s case, energy supply companies buy energy at a levelised, day-ahead wholesale price. In Norway, the proposed national retail price will be implemented through a market subsidy, paid for by the government and funded through taxation. The most likely approaches for consumer shielding in GB would be a targeted subsidy for specific consumer groups – for example, the fuel poor or perhaps specific industries, or a more general price levelisation mechanism. Targeting support for consumer groups or industries would be complex and fraught with political and state-aid issues.
A general price levelisation mechanism has been explored by the REMA team and presented, at a very high level, in recent engagement webinars. This mechanism would seek to retain the temporal marginal price signal, to encourage consumers to respond to volatile zonal prices, but would incorporate an ex-post adjustment calculation to surcharge consumers in low-price zones and subsidise consumers in high-price zones. It is intended to broadly equalise average zonal prices. It would not, however, equalise prices between different consumer groups within zones, so there would still be winners and losers depending on a consumer’s flexibility and ability to take advantage of price volatility.
Very little detail has so far been presented, but in outline, this levelisation approach would raise a number of challenges, including that of calculating the average zonal price, given that the proposed GB design would combine both day-ahead pool-based auctions and some volume of bilateral trading.
There is also the question of how a shielding scheme would be incorporated into the retail market design, and the response of energy supply companies. If shielding leads to increased risk for retailers, they are likely to respond by raising tariff prices and/or introducing more selective pricing or targeting of customers based on their zones and demand profiles.
The biggest challenge, however, is the likely consumer response. Yes, shielding probably makes sense and may be essential to mitigate the zonal price differences. At a minimum, some form of scheme should be prepared in the event of extreme zonal price differences and a public backlash. However, shielding also needs to be considered from a consumer perspective. Imagine consumers being told there is near-zero-cost electricity available in their zone. They respond by investing in a heat pump and an EV, they may forego energy efficiency measures, or they may set up a new business. Then, sometime later, they discover they are being given a price surcharge to provide an equivalent subsidy to consumers in a high-price zone elsewhere.
Shielding measures may be essential, but they must be carefully considered for their practicality and unintended consequences. At a more basic level, the fact that we are even talking about customer shielding mechanisms should raise alarm bells for politicians and ministers who are currently deciding on future market design.
Better solutions are available
If the objective is really to engage consumers in the net-zero transition and harness their support for clean energy, there are far better solutions available. It is notable that, when discussing market reform, many stakeholders immediately associated zonal pricing with some means of local energy supply: being able to buy cheaper energy when the sun is shining and the wind is blowing. That’s a genuine and understandable desire, but that is not what zonal pricing is. However, other market models could enable this to happen as part of a programme of progressive market reform, including local energy supply models, greater use of long-term Power Purchase Agreements, collaborative and power pool PPAs and local generation tariffs. We can also better harness demand flexibility through the adoption of smart technology and the creation of targeted flexibility markets. These have previously been described in Regen’s 2024 paper on Progressive Market Reform.
Conclusions
Politicians and the energy industry need to consider the type of energy transition we want to pursue, as well as the key principles that should underpin it.
In Regen’s view, any market reform that claims to be consumer-centric must be supported by a clear understanding of how it will affect societal fairness and consumer confidence. Intuitively, we can all imagine that most UK citizens would place a high premium on fairness and predictability over potentially volatile and variable pricing. A survey conducted on behalf of Fairer Energy Future found that 70% of respondents would prefer a national pricing model and that 85% thought that zonal pricing would be unfair.12
Even if zonal pricing would bring some economic benefits, which is uncertain and challenged, the theoretical benefits on the table do not seem to outweigh the political risk of creating division and resentment between regions of GB, and between consumer groups, and the impact this may have for the UK’s net zero transition.
As a very minimum, much more work and analysis needs to be conducted to fully explore how consumers will be impacted in a real-world market, and how they are likely to respond.
Key takeaways
Footnotes
FTI, Report for Octopus Energy, Impact of a Potential Zonal Market Design in Great Britain - quantitative assessment of GB Welfare Impact using the base Net Welfare Benefit of £25.2 billion over 20 years, current electricity demand of c. 270 TWh and an average household demand of c. 3 MWh.
“Congestion rents”– value that is captured by the market operator, and is the difference paid toa generator in a low-price zone whose power is exported to consumers paying a higher price in a high-price zone. It is assumed that some portion of this value is distributed to consumers to offset higher wholesale prices, although the mechanism and method to do this is not yet defined, and this value could also be used to compensate generators, fund the market operator and/or fund hedging mechanisms. The more the government promises to protect generators from future zonal price and volume risks, the less transfer value is available for consumers.
North Wales faces a similar challenge being, in effect, part of a North West and Midlands zone, which could face higher zonal wholesale prices.
Zonal pricing in Norway is historic, dating back to the earliest electricity production in the 19th century. It makes sense given Norway’s geography and extensive use of relatively cheap hydropower.Zones were well balanced, with mainly seasonal price differences that helped to manage water resources across the different regions.
Fair Energy Future – aconsortia of industrial energy users and organisations campaigning for incremental market reforms within a national market, 2025.
