Review of Electricity Market arrangements

 

The UK Government this week announced the result of its Review of Electricity Market Arrangements (REMA), electing to reform the current national pricing system rather than implement a more radical switch to locational pricing. As a result of the review, the government has made three announcements:

• A new ‘Strategic Spatial Energy Plan’ (SSEP) to be published in 2026 that promises to improve efficiency of the electricity system within the current national pricing model. This will include reforms to the spatial planning system that the Government promises will cut grid connection times and reduce costs.
• A review of transmission charges that is intended to prioritise development of projects where they are most needed. The government is looking to adapt the Transmission Network Use of System (TNUoS) to reduce the volatility of transmission charges and ensure the costs of transmission system upgrades are factored into siting decisions for new plants.
• Acceleration of critical network upgrades and further reforms to reduce the need for constraint payments. This will consider adapting the balancing mechanism to include small-scale batteries and implementing measures to increase flexibility and transparency in the balancing mechanism.

The reforms focus around improving the way electricity is handled and delivered by the grid, which is welcome news to the offshore wind community. Firstly, the decision to reform the national wholesale electricity price will ensure that offshore windfarms will be located in the best position for optimising wind resource, and provide the largest benefit for the entire UK from offshore wind energy. Additionally, the plans to make the grid capable of handling more renewable energy means that the electricity generated from the 21.3 GW of offshore wind power currently in the pipeline, is at less risk of being curtailed.

The reforms are also positioned to provide confidence to investors of renewables, another encouraging aspect of the announcement. Both the Strategic Spatial Energy Plan, and the potential changes to TNUoS are aimed at reducing uncertainty in costs for the developers, and increasing certainty of connection for consumers.

 

Decision to Abandon Locational Pricing

 

A locational or ‘zonal’ marginal electricity pricing system would have seen the price of electricity vary in different parts of the country based on differing supply across the UK. The price of electricity would be set based on the cost of supplying an additional increment of electricity to a specific ‘zone’ of the country.  Similar systems exist already in other European countries such as Italy, Sweden, Norway, and Denmark. Norway began using zonal pricing in the 1990s, and since the millennium Sweden and Italy have both switched due to grid bottlenecks. In each case the switch was seen as politically sensitive and reception has been mixed.

In the context of the UK, zonal pricing would have meant that prices vastly differ at times in the North and the South of the country. In the North of Scotland, where the wind resource is rich and population is sparse, prices could be near-zero on windy days. In the South of England, and in particular London, the price would be higher due to the lack of renewable energy feeding into the region.

In the current system, physical transmission bottlenecks are handled outside the market – wind farms may be curtailed (and compensated) in low demand zones and a gas plant may be paid to ramp up in a high demand zone. These costs are paid for equally across the market. In a zonal pricing market, any transfer of electricity between zones is managed through prices, though balancing may still be required within the zone.

Proponents of the scheme said that zonal pricing would pass on the benefits of renewable energy to consumers by lowering the wholesale price. The system would likely deter development of offshore wind power in regions of low demand and transmission capacity, thereby limiting the amount that consumers pay to curtail power from windfarms when supply outstrips demand. According to the highest-profile advocates for the scheme, Octopus Energy, their tracker suggests that as of July 2025 payments for curtailments are approaching £700m for this year.

Those against the zonal pricing scheme argued that it would deter investment in the UK energy industry and create a ‘postcode lottery’ where households are ‘punished’ for living in hard-to-supply areas. Concerns were high in the offshore wind industry, as there was a danger that some of the best wind resource locations in the UK (North-east England and Scotland) would see a withdrawal of wind developments, as the risk of revenue once CfD terms came to an end would be too high to merit continuing development. The system also would have come with operational complexity that may have proven difficult to manage.

In general, the decision to maintain a national wholesale energy price is welcome news for the offshore wind industry, ensuring that UK developments will be placed in the best position to capture our valuable wind resource for many decades to come.

 

Implications of REMA

 

Erring on the side of caution in a hotly contested debate over pricing, the UK Government has elected for a path that it hopes can reform the system and reduce curtailment costs without a radical shake-up of the system altogether. Ultimately the Government has sided in favour of increased system investment and prioritized their 2030 ambitions over a new, more experimental system design.

The Government recognised issues with the current system and admitted a “historic failure” to build necessary transmission infrastructure which has created what it calls “transitional constraints”. To this end, the government is committing to system reform that aims to limit curtailment while maximising development at the same time.

Upcoming reviews on the planning and leasing process through the SSEP, and changes to the TNUoS, also have the potential to be extremely impactful for the planning of offshore windfarms. By taking a system-level approach, the Government is helping ensure that development of transmission and generation capacity are aligned. Rather than using the wholesale pricing market to direct new assets to high-demand areas, the Government is hoping to achieve the same goal through a suite of additional levers that will arise from the announced reforms.

The security these reforms provide to the financials of offshore wind projects is also critical. The importance of price stability has a major role in boosting investor confidence and unlocking investment for the supply chain and the grid. It is now crucial for commitments to transmission upgrades are realised to pass on the benefits of renewables to consumers.