He claimed the zonal reforms would take until at least 2032 to deliver and would jeopardise plans laid out by Mr Miliband, the Energy Secretary, to deliver a clean power system by 2030.
Mr Philips-Davies said the policy would push up the cost of the energy transition because wind farm developers such as SSE would have to seek bigger returns to compensate for the unpredictability of zonal pricing.
SSE recently cancelled plans to extend its Blairidh onshore wind farm, in Scotland’s Great Glen, and the executive said this was because the “risk premium” for zonal pricing made the project unviable.
One should also note that current Octopus Director of Regulation (Rachel Fletcher) has stated Zonal reforms are needed to urgently address rising system constraint costs, citing “market failures” as their cause. Yet it was the same person whom, as an Ofgem Partner in the early 2010s, approved the regulatory framework RIIO which arguably failed to deliver timely network reinforcements, the single biggest contributor to current system operational challenges which REMA seeks to solve.
I suspect if it was properly understood at OFGEM just how much grid and storage is required for a renewables dominated system it would never have got off the ground.
I checked up on the CFD terms in relation to the Intermittent Market Reference Price: they are quite clear that it cannot be replaced without the written agreement of the CFD holder. There are very extensive provisions designed to preserve the sentiment in the event that the AMX and Noordpool markets ceased for some reason, all aimed at ensuring a national Day Ahead hourly price basis. Variation from that would not be easy without considerable palm greasing.
Worth noting that some of the earlier CFDs included a clawback provision: when they were signed, generators did pay a lot more of a contribution under TNUoS, and their strike prices duly reflected that. But it was anticipated that OFGEM would rule to transfer most of the charges directly to consumers, in which event there was a strike price adjustment to offset the benefit of charges no longer being levied. The principle is thus established that if the government reduced the return on CFDs by changing the basis compensation should be payable. There are also the QCiL provisions See for example pp140ff in AR4 Standard Terms, which guarantee compensation for loss arising.
Great article! It would appear that those promoting locational pricing are deliberate in their desire to yet further complicate electricity delivery. The more they obfuscate, the less users will be able to 'see' the scandalous amount of tax payers money is being used to subsidise renewables and line the pockets of these snake oil salesman. Eventually, analysis will be so complex that it will be practically impossible to follow the money.
I think you go it pretty much right in your previous analysis (Consumers to be reamed by REMA). The fact is that if you build an expensive system with lots of surplus renewables capcaity and lots of grid to tie it together along with other costly features like batteries and pumped storage and grid stabilisation kit it all has to be paid for somehow. The main function of zonal prices under REMA is to create winners and losers rather than to tackle costs.
As the LCP Delta report makes clear, the decision on what to build, including grid, has already been taken by NESO and DESNZ. There is no scope whatever to optimise asset choices, and the only thing that zonal pricing might do is "justify" yet more grid. On the other hand, the LCP Delta assumption that interconnectors would be re-dispatched is basically assuming that you can make free use of the Continental grid to provide the balancing. As the Germans know, that soon runs into opposition. Indeed, we need first to sort out the whole business of perverse flows that are already affecting the UK grid: Imports from Norway being re-exported to Denmark, or from Belgium going to France via Kent, or even both ways simultaneously on Eleclink and IFA1 between Sellindge and Coquelles/Les Mandarins in France. Europe is plagued by this in the supposed interest of European equity: see
The risk is surely that a programme of SMR build close to centres of demand will make huge swathes of grid investment redundant - and the associated wind generation along with it. The present reality is that once again thanks to EU regulation, generators are only charged for their grid connection and bear almost no consequence of their location otherwise, other than a propensity to be curtailed. That has paid huge dividends given that constraint payments were excluded from the Generator Levy, along with compensation for loss of subsidy that has until now largely determined the level of payment. Remember that Alex Salmond fixed it for Scotland not to have to pay a genuine locational based TNUoS charge that would have made wind uneconomic from the outset - and then went on to enshrine the principle in EU law.
The underlying reality is that CFDs were underpriced from AR3 onwards partly because the industry reckoned that the government would have to fix it afterwards. That is the real purpose of REMA. As we have already seen with Drax, the result is higher subsidies on any reasonable assumptions. Existing investments are not going to sign up to new terms unless they are more generous than the old ones: they will stick to their contracts otherwise. It's the new investments that are in difficulty and which will need bailing out - or cancelling and replacement with something more sensible. We have seen Seagreen depend on constraint income rather than generation - a ploy now at an end because of competition among generators with no subsidy when wind is surplus. Hornsea 4 and Norfolk Boreas and AR5 are all casualties, and there is no sign of lower costs with Inch Cape having managed to secure an FID on a cost of over £3m/MW which will struggle for profit at £47.30/MWh current CFD strike price. The bailout plans to use hydrogen will simply add to cost.
The reality of ever rising surplus generation as renewables capacity expands has been ignored by DESNZ and OFGEM and the CCC and NESO. It guarantees that a renewables centred system will be very costly, however you tinker with whose pocket you rob in further distortion of proper market outcomes.
Given how heavily Octopus Energy features in this discussion, I‘ll recycle this comment I posted under a Dec 2024 Jaime Jessop post “Can Octopus Survive Contact With Reality When It Employs People Like This?”: https://jaimejessop.substack.com/p/can-octopus-survive-contact-with
The segment starts with a “you couldn’t make it up” outpouring of nonsense from the co-president of the Club of Rome. It goes on to analyse Octopus Energy, valued at $8 billion and the biggest energy supplier in the UK after just 8 years. Ben thinks this is has a lot to do with their Common Purpose leanings and political/media/Davos connections. He talks about their Kraken AI-powered grid management system which is being rolled out widely. He describes how they are planning to create “synthetic smart meter data” to manage intermittency. Ben is not impressed and concludes that it will all lead to disaster.
Nodal pricing will be used to prioritise high priced areas such as the South East, diverting scare energy where the profit is highest. The aim of this farcical approach is too be able to cherry pick a couple of customers and claim massive savings whilst raising prices everywhere- we already have a price structure that dictates “heat or eat”, this new structure will make the current situation look charitable in the extreme.
Interesting that certain energy companies are pushing hard, one of them constantly advertises that it customers give gushing praise for how wonderful they are- it’s hard to believe that anyone could get excited about a product that is available from a number of sources, does nothing different to other sources.
Why not have similar pricing for food, after all, supermarkets near the distribution warehouses incur lower transport costs, why not similar pricing for beer, after all pubs nearest to the brewery incur lower costs, why not similar pricing for clothing, after all retails nearest the factory or distribution warehouses incur incur lower pricing for transport, why not postage or parcel, after all those who live closest to the distribution incur lower transport costs- just think, you could drive inflation up tremendously whilst increasing profits and bonuses just by screwing those who live furtherest from anywhere, and, with a bit of jiggerypokery, you could fix it so that the base price for delivery to the nearest customers was based on current transport costs to furthest distance- think of the profit!, think of the bonus structure!, whoa, this is the new gold rush- imagine a loaf of bread could cost as little as £3 next to the bakery but £12 three miles away.
The simple reason behind this push is profit and bonuses for management- coupled with ever rising subsidies to add even more to the profit pile.
Living in the lightly populated North of Scotland where the landscapes and seascapes are carpeted in wind farms, I’m very wary of locational pricing of electricity. The holier than thou Scottish so-called government has steamrollered through, usually against fierce local opposition, the proliferation of wind farms even as far north as John O’Groats, Orkney and Shetland, with irresponsible disregard for the costs of getting this sub-standard electricity to the population centres where it can be used.
I confess I haven’t studied the arcane technicalities of the REMA proposals, but seeing how they are the brainchild of the usual suspects of the bought-and-paid-for green blob, it seems likely that locational pricing could have a very adverse effect on my bills, and probably everyone else.
If these people really want to cut our energy bills, they should stop deploying expensive, inefficient, short lifespan, resource depleting wind farms. Ever better, they should scrap pointless unilateral Net Zero and all its legally-binding tentacles.
“The Government’s Generation Cost report should be withdrawn because the faulty figures within it are being used to support fundamental decisions about how the electricity market should work.” In other words the report is doing exactly what it was commissioned to do.
Thank you David! I'm a simple country boy and I thought that the idea of a national grid was a grid which is national, able to convey energy from where it is generated to where it is needed. The idea of zonal or regional pricing is therefore cuckoo.
The only way it can make sense to me is as a means of bribing folk to accept wind and solar farms, pylons and cables.
This article deserves to be published in the Daily Telegraph in light of the huge public interest re. locational pricing and the evident internal corruption of our 'independent' energy regulator Ofgem, as well as the UK's largest energy company, Octopus, whose director is rabidly pro-renewables and who labels anyone sceptical of the Net Zero final solution on social media as a 'climate denier'.
Excellent article. Disappointingly my elderly neighbor was really taken in by Greg on QT. So what I don't fully understand is why they are pushing this? Is Locational pricing a good precursor to granular pricing based on usage, demand etc? Which given the modern miracle of the grid, it implies a synthetic abstraction layer on top. Clearly additional levels of abstraction and increased complexity are costly in the aggregate and play into the hands of the snake oil salesmen.
Most interesting commentary. It very clearly shows the huge inefficiencies in government, in its thinking, and in its management of technical matters. There appears to be a mad rush to creating increasingly complex systems, based on evermore computer systems open to an individual’s partiality, that completely lose the fundamental purpose of cheap and reliable electricity to the domestic user, and those that create wealth through industry and trade. The whole edifice needs a complete reset, by grown-ups that know the realities. That applies to the politicians and civil servants involved primarily, the rest will change thereafter.
Well a certain Al Gore is a significant financial backer of Octopus Group, along with Australian and Japanese backers. Their big breakthrough was acquiring the rights of a clever billing software system from a dubious Eastern European source. Its basically the efficiencies of that system that allowed them to take over customer records previously run on old clunky pre privatisation systems owned originally by Area Electricity Boards. The export of that billing system has allowed their international expansion.
Sensibly they have never taken trading risk just concentrated on milking the billing system on a wafer thin margin business.
Because very few understand what a UK electricity 'supply' business actually is ie just a billing customer service operation they have moneged the PR superbly to make it look like they are far more significant than they really are.
It's a very classic tale of a rather small tail wagging a dog.
Incidentally there is nothing new about zonal or mode price signals, the old CEGB used them in the 70s. But to try to use them for real time retail pricing is just very very silly.
However I expect this government will go with it as they will see it as a good ruse to disguise true costs, none will easily see what a rip off net zero is.
No surprises here:
https://www.msn.com/en-gb/money/other/ed-miliband-warned-his-energy-shake-up-risks-economic-disaster/ar-AA1zuq0k
He claimed the zonal reforms would take until at least 2032 to deliver and would jeopardise plans laid out by Mr Miliband, the Energy Secretary, to deliver a clean power system by 2030.
Mr Philips-Davies said the policy would push up the cost of the energy transition because wind farm developers such as SSE would have to seek bigger returns to compensate for the unpredictability of zonal pricing.
SSE recently cancelled plans to extend its Blairidh onshore wind farm, in Scotland’s Great Glen, and the executive said this was because the “risk premium” for zonal pricing made the project unviable.
Bigger subsidies under the table are coming: a sudden rush to sweeten AR7.
https://www.gov.uk/government/consultations/further-reforms-to-the-contracts-for-difference-scheme-for-allocation-round-7
One should also note that current Octopus Director of Regulation (Rachel Fletcher) has stated Zonal reforms are needed to urgently address rising system constraint costs, citing “market failures” as their cause. Yet it was the same person whom, as an Ofgem Partner in the early 2010s, approved the regulatory framework RIIO which arguably failed to deliver timely network reinforcements, the single biggest contributor to current system operational challenges which REMA seeks to solve.
I suspect if it was properly understood at OFGEM just how much grid and storage is required for a renewables dominated system it would never have got off the ground.
I checked up on the CFD terms in relation to the Intermittent Market Reference Price: they are quite clear that it cannot be replaced without the written agreement of the CFD holder. There are very extensive provisions designed to preserve the sentiment in the event that the AMX and Noordpool markets ceased for some reason, all aimed at ensuring a national Day Ahead hourly price basis. Variation from that would not be easy without considerable palm greasing.
Worth noting that some of the earlier CFDs included a clawback provision: when they were signed, generators did pay a lot more of a contribution under TNUoS, and their strike prices duly reflected that. But it was anticipated that OFGEM would rule to transfer most of the charges directly to consumers, in which event there was a strike price adjustment to offset the benefit of charges no longer being levied. The principle is thus established that if the government reduced the return on CFDs by changing the basis compensation should be payable. There are also the QCiL provisions See for example pp140ff in AR4 Standard Terms, which guarantee compensation for loss arising.
I have drafted a piece on Reform's energy policy and added the legal risk of a windfall tax to the analysis.
But it will take a little while to publish. I need to get my EPC article out this Sunday before the consultation closes.
Great article! It would appear that those promoting locational pricing are deliberate in their desire to yet further complicate electricity delivery. The more they obfuscate, the less users will be able to 'see' the scandalous amount of tax payers money is being used to subsidise renewables and line the pockets of these snake oil salesman. Eventually, analysis will be so complex that it will be practically impossible to follow the money.
I think you go it pretty much right in your previous analysis (Consumers to be reamed by REMA). The fact is that if you build an expensive system with lots of surplus renewables capcaity and lots of grid to tie it together along with other costly features like batteries and pumped storage and grid stabilisation kit it all has to be paid for somehow. The main function of zonal prices under REMA is to create winners and losers rather than to tackle costs.
As the LCP Delta report makes clear, the decision on what to build, including grid, has already been taken by NESO and DESNZ. There is no scope whatever to optimise asset choices, and the only thing that zonal pricing might do is "justify" yet more grid. On the other hand, the LCP Delta assumption that interconnectors would be re-dispatched is basically assuming that you can make free use of the Continental grid to provide the balancing. As the Germans know, that soon runs into opposition. Indeed, we need first to sort out the whole business of perverse flows that are already affecting the UK grid: Imports from Norway being re-exported to Denmark, or from Belgium going to France via Kent, or even both ways simultaneously on Eleclink and IFA1 between Sellindge and Coquelles/Les Mandarins in France. Europe is plagued by this in the supposed interest of European equity: see
https://timera-energy.com/blog/flow-based-market-coupling-counterintuitive-flows-in-europe/
The risk is surely that a programme of SMR build close to centres of demand will make huge swathes of grid investment redundant - and the associated wind generation along with it. The present reality is that once again thanks to EU regulation, generators are only charged for their grid connection and bear almost no consequence of their location otherwise, other than a propensity to be curtailed. That has paid huge dividends given that constraint payments were excluded from the Generator Levy, along with compensation for loss of subsidy that has until now largely determined the level of payment. Remember that Alex Salmond fixed it for Scotland not to have to pay a genuine locational based TNUoS charge that would have made wind uneconomic from the outset - and then went on to enshrine the principle in EU law.
The underlying reality is that CFDs were underpriced from AR3 onwards partly because the industry reckoned that the government would have to fix it afterwards. That is the real purpose of REMA. As we have already seen with Drax, the result is higher subsidies on any reasonable assumptions. Existing investments are not going to sign up to new terms unless they are more generous than the old ones: they will stick to their contracts otherwise. It's the new investments that are in difficulty and which will need bailing out - or cancelling and replacement with something more sensible. We have seen Seagreen depend on constraint income rather than generation - a ploy now at an end because of competition among generators with no subsidy when wind is surplus. Hornsea 4 and Norfolk Boreas and AR5 are all casualties, and there is no sign of lower costs with Inch Cape having managed to secure an FID on a cost of over £3m/MW which will struggle for profit at £47.30/MWh current CFD strike price. The bailout plans to use hydrogen will simply add to cost.
The reality of ever rising surplus generation as renewables capacity expands has been ignored by DESNZ and OFGEM and the CCC and NESO. It guarantees that a renewables centred system will be very costly, however you tinker with whose pocket you rob in further distortion of proper market outcomes.
Given how heavily Octopus Energy features in this discussion, I‘ll recycle this comment I posted under a Dec 2024 Jaime Jessop post “Can Octopus Survive Contact With Reality When It Employs People Like This?”: https://jaimejessop.substack.com/p/can-octopus-survive-contact-with
UK Column’s Ben Rubin did a great 18-minute segment on the lunacy of Net Zero and the nutters of Octopus Energy last August, starts at 47:41: https://www.ukcolumn.org/video/uk-column-news-5th-august-2024.
The segment starts with a “you couldn’t make it up” outpouring of nonsense from the co-president of the Club of Rome. It goes on to analyse Octopus Energy, valued at $8 billion and the biggest energy supplier in the UK after just 8 years. Ben thinks this is has a lot to do with their Common Purpose leanings and political/media/Davos connections. He talks about their Kraken AI-powered grid management system which is being rolled out widely. He describes how they are planning to create “synthetic smart meter data” to manage intermittency. Ben is not impressed and concludes that it will all lead to disaster.
Separately, here is Octopus CEO Greg Jackson telling patently-obvious lies on Question Time: https://x.com/OctopusEnergy/status/1857191347788145022.
Nodal pricing will be used to prioritise high priced areas such as the South East, diverting scare energy where the profit is highest. The aim of this farcical approach is too be able to cherry pick a couple of customers and claim massive savings whilst raising prices everywhere- we already have a price structure that dictates “heat or eat”, this new structure will make the current situation look charitable in the extreme.
Interesting that certain energy companies are pushing hard, one of them constantly advertises that it customers give gushing praise for how wonderful they are- it’s hard to believe that anyone could get excited about a product that is available from a number of sources, does nothing different to other sources.
Why not have similar pricing for food, after all, supermarkets near the distribution warehouses incur lower transport costs, why not similar pricing for beer, after all pubs nearest to the brewery incur lower costs, why not similar pricing for clothing, after all retails nearest the factory or distribution warehouses incur incur lower pricing for transport, why not postage or parcel, after all those who live closest to the distribution incur lower transport costs- just think, you could drive inflation up tremendously whilst increasing profits and bonuses just by screwing those who live furtherest from anywhere, and, with a bit of jiggerypokery, you could fix it so that the base price for delivery to the nearest customers was based on current transport costs to furthest distance- think of the profit!, think of the bonus structure!, whoa, this is the new gold rush- imagine a loaf of bread could cost as little as £3 next to the bakery but £12 three miles away.
The simple reason behind this push is profit and bonuses for management- coupled with ever rising subsidies to add even more to the profit pile.
Energy miles - yay!
Living in the lightly populated North of Scotland where the landscapes and seascapes are carpeted in wind farms, I’m very wary of locational pricing of electricity. The holier than thou Scottish so-called government has steamrollered through, usually against fierce local opposition, the proliferation of wind farms even as far north as John O’Groats, Orkney and Shetland, with irresponsible disregard for the costs of getting this sub-standard electricity to the population centres where it can be used.
I confess I haven’t studied the arcane technicalities of the REMA proposals, but seeing how they are the brainchild of the usual suspects of the bought-and-paid-for green blob, it seems likely that locational pricing could have a very adverse effect on my bills, and probably everyone else.
If these people really want to cut our energy bills, they should stop deploying expensive, inefficient, short lifespan, resource depleting wind farms. Ever better, they should scrap pointless unilateral Net Zero and all its legally-binding tentacles.
“The Government’s Generation Cost report should be withdrawn because the faulty figures within it are being used to support fundamental decisions about how the electricity market should work.” In other words the report is doing exactly what it was commissioned to do.
Thank you David! I'm a simple country boy and I thought that the idea of a national grid was a grid which is national, able to convey energy from where it is generated to where it is needed. The idea of zonal or regional pricing is therefore cuckoo.
The only way it can make sense to me is as a means of bribing folk to accept wind and solar farms, pylons and cables.
Salami slicing a problem is not a solution to the problem. Renewables are expensive.
This article deserves to be published in the Daily Telegraph in light of the huge public interest re. locational pricing and the evident internal corruption of our 'independent' energy regulator Ofgem, as well as the UK's largest energy company, Octopus, whose director is rabidly pro-renewables and who labels anyone sceptical of the Net Zero final solution on social media as a 'climate denier'.
Excellent article. Disappointingly my elderly neighbor was really taken in by Greg on QT. So what I don't fully understand is why they are pushing this? Is Locational pricing a good precursor to granular pricing based on usage, demand etc? Which given the modern miracle of the grid, it implies a synthetic abstraction layer on top. Clearly additional levels of abstraction and increased complexity are costly in the aggregate and play into the hands of the snake oil salesmen.
Most interesting commentary. It very clearly shows the huge inefficiencies in government, in its thinking, and in its management of technical matters. There appears to be a mad rush to creating increasingly complex systems, based on evermore computer systems open to an individual’s partiality, that completely lose the fundamental purpose of cheap and reliable electricity to the domestic user, and those that create wealth through industry and trade. The whole edifice needs a complete reset, by grown-ups that know the realities. That applies to the politicians and civil servants involved primarily, the rest will change thereafter.
Well a certain Al Gore is a significant financial backer of Octopus Group, along with Australian and Japanese backers. Their big breakthrough was acquiring the rights of a clever billing software system from a dubious Eastern European source. Its basically the efficiencies of that system that allowed them to take over customer records previously run on old clunky pre privatisation systems owned originally by Area Electricity Boards. The export of that billing system has allowed their international expansion.
Sensibly they have never taken trading risk just concentrated on milking the billing system on a wafer thin margin business.
Because very few understand what a UK electricity 'supply' business actually is ie just a billing customer service operation they have moneged the PR superbly to make it look like they are far more significant than they really are.
It's a very classic tale of a rather small tail wagging a dog.
Incidentally there is nothing new about zonal or mode price signals, the old CEGB used them in the 70s. But to try to use them for real time retail pricing is just very very silly.
However I expect this government will go with it as they will see it as a good ruse to disguise true costs, none will easily see what a rip off net zero is.