Government review shows that location-based pricing can significantly reduce costs in some locations, especially Scotland.
Energy prices based on the location and proximity of generating assets such as wind turbines is one of the options proposed in the UK Electricity Market Review, which also suggests that households could benefit from lower prices if they shift consumption abroad.
The Review of Electricity Market Agreements, which has been described by the Department of Business, Energy and Industrial Strategy as the “biggest electricity market reform of a generation”, aims to address the problems of the electricity market, where electricity has Generally lowered the price of gas electricity follows, although Britain has built more renewable capacities, such as offshore wind, which produces very cheap energy once turbines are installed.
This is because the cost of the most expensive form of generation, usually gas-fired power plants, determines the price for the entire market. Gas remains the main source of electricity generation in the UK.
Under the current system, consumers also have to bear the cost of hundreds of millions of pounds of shutting down wind farms, mainly in Scotland, on particularly stormy days, because there are not enough cables and conduits to guarantee that all electricity reaches areas such as the South East of England and London where demand is greater.
Under the new plans, owners of wind turbines in Scotland could be charged less for electricity on peak days, while generators could be charged more elsewhere. This, in turn, encourages utilities to build generating capacity where there are no grid limits.
The methods of domestic delivery of these prices may vary. The consultation document suggests that suppliers could charge customers an average price everywhere, or that prices could vary depending on where people live, to encourage more electricity consumption when more electricity from renewable sources is available.
Commerce Minister Kwasi Kwarteng is skeptical about the political feasibility of setting different electricity prices depending on where consumers live.
Darren Jones, Labour chair of the business select committee, said it was right for bill payers to have the opportunity to pay less for cheaper renewable energy. He said:
“But it would be a great shame if the British public at large suffered as a consequence of weak ministers unable to do the right thing in the first place. Ironically, this is most likely to affect constituents who live in the areas represented by backbench Conservative MPs who blocked onshore wind in the first place.”
A study published by Catapult Energy Systems and supplier Octopus Energy in May, found that a location-based price would save energy consumers everywhere, but “disproportionately more” in Scotland and the north of England.
Although consumers are not always exposed to the risk, any change based on location could raise concerns that consumers in the south of England could be unfairly disadvantaged.
Such setup is not unheard of as location-based electricity pricing already exists in a number of international markets, including the United States, New Zealand and Singapore.