Zonal pricing dropped; what now?

  • On 10 July 2025 the UK government announced its decision to ditch plans for zonal pricing in Great Britain (GB). 
 

Zonal Pricing

The summer update of the Review of Electricity Market Arrangements (‘REMA’) marked a pivotal moment for the UK energy sector; the government has confirmed that it will not move forward with zonal pricing and the GB market will instead retain a single, national wholesale system alongside a series of new reforms. 

The scrapped proposal would have divided GB into regional electricity pricing zones, with wholesale prices reflecting local supply and demand dynamics. It would have marked a major shift from the current system, where electricity prices are effectively set by the most expensive power source needed to meet the balance of demand anywhere in the country—typically natural gas. 

Proponents of zonal pricing argued that the UK’s grid is inadequately equipped to deliver electricity from renewables-rich areas like Scotland to major consumption areas elsewhere, particularly in England. As a result, renewable energy projects in Scotland are frequently curtailed due to grid constraints, yet still receive payments for this unused output. Gas-fired power stations that are located closer to major demand centres on the other hand are paid to increase generation in order to re-balance the system. This imbalance has led to a significant financial burden which has gained much publicity. Curtailment costs reached approximately £1.2 billion in 2024; an annualised 34% increase from the £500m paid out in 2021.

Although research by some industry players estimated potential annual savings to consumers of approximately £3.7 billion from the introduction of zonal pricing, the government decided that the risks, such as uncertainty for investors, its complexity, and the amount of time needed to implement the new system, would outweigh the benefits. Whilst this decision is viewed as a positive step by many investors, analysts have cautioned that large-scale reform through other means is still necessary to address long-term structural challenges in the UK’s energy system.
 

Planned Reforms

The REMA update contains detail of some of the government’s planned reforms to address these structural issues. 

Generation and Grid Reconfiguration: The government is expected to publish its Reformed National Pricing Delivery Plan in the second half of 2025. A key part of the framework is the Strategic Spatial Energy Plan (‘SSEP’) aimed at providing incentives for the more efficient geographical deployment of projects based on grid capacity and expected demand amongst other factors. In parallel, the Centralised Strategic Network Plan (‘CSNP’) aims to ensure an optimised configuration of transmission infrastructure to support efficient connections between generation and demand centres. Both initiatives will be underpinned by the Regional Energy Strategic Planner (‘RESP’), which aims to deliver insights into future energy demand, supply, and infrastructure needs, enabling alignment between regional and national plans.

Optimised Constraint Management: Further changes are planned to optimise constraint management, including lowering the thresholds for renewable energy assets to participate in grid balancing. This is intended to enhance the National Grid’s flexibility in managing congestion costs more effectively.

Stabilising Transmission Charges: Complementing these measures, the government also intends to work with Ofgem to introduce targeted policy reforms to address the volatile Transmission Network Use of System (‘TNUoS’) charges. Currently, these charges fluctuate significantly from year to year, driven by factors such as transmission distance and projected maintenance and upgrade costs. The proposed reforms aim to smooth out these fluctuations, providing greater predictability and investment certainty for investors.
 

Clean Power 2030 Targets

Development of the grid system is considered essential if the UK is to achieve its 2030 clean energy target. Of the £40 billion annual investment target set out in the government’s action plan, it’s estimated around a quarter of this will need to be committed to transmission network assets. The government expects the remaining £30 billion to be invested in new generation and storage capacity.

A range of policy measures have been introduced to support this objective. Notably, the extension of Contracts for Difference (‘CfD’) terms for solar and wind projects—from 15 to 20 years—has been well-received by the investment community, as well as an inflation-adjusted increase in CfD strike prices announced on 23 July in anticipation of August’s AR7 auction. Additionally, the government has relaxed CfD eligibility criteria for renewable technologies, most notably offshore wind, by permitting fixed-bottom offshore wind projects to apply even while awaiting full planning permission. This step acknowledges the critical role offshore wind is expected to play in meeting the UK’s energy targets.

Collectively, it is hoped these measures will strengthen the UK’s attractiveness to investors, ensure optimal utilisation of locally produced energy, and thereby address a fundamental challenge in achieving energy independence.
 

Where BDO can help

BDO has significant market insights through the breadth of its advisory and audit relationships combined with the expertise of our international network spanning over 160 countries. Our UK team includes industry and financial specialists such as chartered accountants, tax advisers, and chartered engineers, all ready to support companies within the renewables and wider energy transition sector at any stage of their project lifecycle. Whether you're involved in initial development, financing, investment, project procurement, restructuring, or divestment, we can assist.

Our clients are active both in the UK and internationally, operating across wind, solar, energy storage, hydrogen, and other technologies, as well as support industries. Our broad expertise means we can address the specific needs of companies in each technology sector, ensuring they receive tailored support and insights. This broad exposure allows us to navigate different markets, regulatory frameworks, and geopolitical landscapes, providing insights into best practices, regulatory compliance, market trends, and investment opportunities.

BDO’s offering comprises:

  • Valuation Services
  • Business restructuring
  • Transaction services
  • Audit and assurance
  • Financial modelling
  • Due diligence
  • Tax including R&D, corporate tax compliance, transfer pricing and VAT
  • Strategic advisory
  • Business services and outsourcing

To find out more on this topic and for a conversation on how BDO can support you with your valuation requirements, please get in touch with Simon Jones or Adam Cuthbertson.