There is one phrase on everyone’s lips in the energy sector this month – zonal pricing – with a decision on this significant and divisive issue expected in the summer ahead of AR7. At stake is much more than market design; zonal pricing could transform how electricity is priced, produced, and who ultimately foots the bill.

What is zonal pricing?

Zonal pricing sets electricity prices by geographic region, based on local supply, demand and transmission capacity. In the UK, this would mean cheaper electricity in renewable-rich, low-demand regions like Scotland, and potentially higher prices in power-hungry zones (like London) constrained by limited local generation and congested transmission corridors.

The case for reform

A coalition including Octopus, OVO, NESO, Ofgem CEO Jonathan Brearley, Energy Systems Catapult, and E3G has rallied behind zonal pricing, arguing that it offers four key system-level gains:

• Lower prices: Aligning wholesale prices with the true cost of local generation enables lower prices in renewable-rich zones.
• System efficiency: Total system costs will be cut by minimising reliance on expensive (and visually disruptive) long-distance transmission.
• Capital reallocation: Industrial demand and private investment will be incentivised to flow into regions with the cleanest (and therefore cheapest) energy.
• Targeted infrastructure deployment: More efficient grid planning will be encouraged by channelling upgrades only where constraints and value justify them.

Ultimately, advocates argue that the current market model is outdated – a legacy of the coal era and no longer fit for a grid dominated by renewables.

An FTI Consulting report, claiming that zonal pricing could save British consumers £55 billion, has been a key cornerstone of their argument – however, it has been widely noted that the report was commissioned by Octopus, whose Kraken platform allegedly stands to benefit from the shift to zonal – a detail that’s fuelled accusations of commercial self-interest.

The case against zonal

Critics – which include a bloc of 55 major energy companies like Centrica, SSE, Scottish Power, Orsted, and Ecotricity – are united in opposition. Their concerns are broad, including:

• Investor uncertainty and higher capital costs – with an LCP Delta study warning that a 1% rise in capital costs from policy uncertainty could add £50 billion to the UK’s energy transition bill.

• The impact on inflexible industries that can’t shift operations to follow pricing zones.
• Local power market abuse with manipulated prices in congested urban areas.
• Misdiagnosis of the core issue, with many arguing the problem is gas-linked wholesale pricing

What now, Ed?

With the next CfD auction approaching, the final decision now rests with the Cabinet, following the recommendations of Energy Secretary Ed Miliband.

Although nominally technical, the implications of the decision are deeply political.

Scottish consumers may benefit immediately – a tempting win for Labour as they look to regain ground where its North Sea energy stance has cost it dearly. Perhaps more significantly, reducing the need for pylons in areas like the East of England could ease pressure in key electoral battlegrounds, where PLMR’s latest polling shows Labour is vulnerable.

Yet zonal pricing could also fuel political backlash, alongside opposition within the industry – potentially handing a narrative weapon to critics in the right-wing press, fuelling cost-of-living anxieties with inflammatory headlines like, as recently seen, “MAPPED: Where energy bills will SURGE under Miliband’s ‘zonal’ pricing plan – are you in the red?”.

When the Cabinet makes its decision, these headlines will be hard to ignore – made more troubling by the fact that zonal pricing wasn’t Labour’s idea at all, rather the brainchild of the previous Conservative government.

Regardless of the final decision, zonal pricing has revealed the political and structural tensions at the heart of energy reform – a reminder that even seemingly technical changes are as much about politics as they are about policy.