‘Postcode lottery’ warning as UK energy chief weighs bills shake-up

This article was written by Charlie Cooper and published on Politico.

“There are an awful lot of questions that need to be answered before we go for this,” says one Conservative MP.

LONDON — Claire Coutinho has promised to cut your energy bills. But she could end up hiking your neighbor’s in the process.

The U.K. energy secretary is mulling sweeping reforms to the electricity market which, advocates say, could reduce bills by billions of pounds over the next 15 years.

But critics warn the proposals could also create a politically toxic “postcode lottery” — with voters and businesses in England and Wales hit with higher bills than in Scotland.

And ministers have been warned about how the public might react to different models currently being considered by the government, potentially including the creation of hundreds or even thousands of different, hyper-local wholesale electricity prices all over the country.

A delayed consultation on the plans is now due before Easter, with backbench Conservative MPs urging Coutinho to find a way to fix the U.K.’s creaking energy system without doing “profound” damage to local economies.

Dare to REMA

It is all part of little-known reforms — the catchily-titled Review of Electricity Market Arrangements (REMA) — which Whitehall officials have been working on quietly for two years.

At the heart of the sprawling package is a proposal to ditch Britain’s single national wholesale electricity price in favor of so-called locational marginal pricing (LMP).

A local approach, experts say, would better reflect the mounting cost of moving electricity across the country through the power grid, from where it is generated (often in remote Scottish offshore wind farms) to where it is used (chiefly big cities and industrial hubs in England.) 

The government’s latest consultation was originally promised before Christmas. Ministers missed that deadline and the paper is now expected after the Budget and before Easter. The energy industry is watching nervously to see whether locational pricing is still on the table.

Uncertainty ahead

The Department for Energy Security and Net Zero insists that any decision will include safeguards to “protect consumers.” But delivering such a huge shake-up, while ensuring households are not unfairly penalized, poses challenges both practical and political.

“There are an awful lot of questions that need to be answered before we go for this,” Conservative MP Mark Garnier, a member of the House of Commons Energy Security and Net Zero Committee, told POLITICO.

“I’m uncertain how we would answer all these questions — and you could go down a path that has profound economic impacts on certain areas of the U.K. if it’s not done properly.”

The hated postcode lottery

Advocates for locational pricing — already used in New Zealand and parts of Europe, the U.S., and Canada — say it encourages developers to build new power sources like wind farms or solar parks closer to big demand centers like cities or industrial areas. That reduces the costs of moving electricity around the country and leads to cheaper bills for everyone.

Power-hungry businesses like data centers or factories might also end up building closer to clean energy sources to benefit from cheap electricity — or so the business case goes.

There are already some differences in energy bills between different parts of the U.K., usually reflecting the cost of running local power networks.

But if locational pricing were introduced and the wholesale price — the biggest part of any electricity bill — was passed directly onto consumers, it could lead to much bigger regional variation in energy bills, potentially of hundreds of pounds.  

And this is where the political trouble could start. Consumers really dislike existing differences in energy bills between regions, said Kate Mulvany, principal consultant at Cornwall Insight.

“There’s a sense of unfairness,” she said. “People live where they live. They weren’t involved in the decision of where to put Sizewell C [a nuclear energy plant], or the geography of the North Sea shelf, which happens to be amazing for offshore wind. It’s out of their control.”

Winners and losers

Most experts say that households could be shielded from a postcode lottery on bills so long as the wholesale price was not passed directly onto domestic consumers. But precisely how you do this would be a “political challenge” for Coutinho and her advisers, says Josh Buckland, a former Number 10 energy adviser and now a partner at Flint Global.

This includes questions over whether protecting households and small businesses from higher prices would mean the impact of the reforms fell on “high demand users” — like factories — and on power generators themselves, who could face varying regional prices for their electricity, Buckland says.

“It’s not just a theoretical change, it’s a real and material change. And from the work I’ve done in politics, it’s the losers who tend to shout the loudest, even if the change has a strong economic rationale,” he added.

Long grass

The scale of the reform means that the imminent consultation may do little more than narrow down the government’s options. The big decisions could be left to whoever is in charge after the general election, expected this fall.

“The political realities of what this means could potentially bite on a Labour government,” said Buckland. “I haven’t seen them say a huge amount on this area because of the level of political risk that exists.”

A Department for Energy Security and Net Zero spokesperson said that “affordability” would be “at the heart of any reform to the market.”

“We are considering a range of options to ensure a fairer deal for households and businesses across the U.K.,” they added. 

“While no decision has been taken on whether to introduce locational pricing, there are a number of ways this model can be implemented to protect consumers and better match where energy is generated and used.”

To tinker or not to tinker

But the government will have to make its mind up sooner or later, other experts warn. Years more tinkering with the market could put off green investors and force up the cost of power projects, just when the U.K. needs them to help deliver net zero.

And if higher capital costs for green projects end up being passed onto energy bills, some developers say, that would undermine the whole purpose of locational pricing.  

“Injecting further volatility and uncertainty into our energy market would have very real and very negative consequences for billpayers,” says Nick Hibberd, market policy analyst at RenewableUK, a trade body for clean energy developers.

“If locational marginal pricing were to be implemented, it wouldn’t only increase costs across our whole energy system, but it would also create a bizarre regional or local postcode lottery of prices for consumers, inflating bills in England especially.”

On the other side of the debate, modeling commissioned by the regulator Ofgem concluded that a switch to locational pricing would lower energy bills across the board. “Net consumer benefits” of different forms of local pricing (compared to doing nothing) range from £15 billion to £51 billion between 2025 and 2040, the research found, with energy bills £56 a year lower on average thanks to the reform.

Changing clunky rules

“Our energy bills are stuffed with extra costs because of clunky old rules about how power is treated on its journey from the place it is generated to the homes and businesses where it is used,” said John Penrose, a Conservative MP.

Penrose played a key role in designing another big recent energy market reform — the price cap. He now thinks locational pricing is the way to modernize Britain’s creaking power system.

“[E]veryone’s energy will be cheaper without a postcode lottery on prices” if the reforms are carried out properly, he said.

“Taxpayer subsidies will be lower, British manufacturing will be more competitive, and we will reach net zero via the cheapest possible route. So it’s a no-brainer, and I only wish we’d move even faster to get it done.”

But others sound a note of caution.

“In principle, it’s a good idea to look at it,” said Penrose’s Conservative colleague Mark Garnier. “But you’re presenting an extraordinarily large number of uncertainties and questions about what the economic impact is going to be on a particular region or an area.

“If we’re going to have 2,000 different nodes, I’m going to have three in my constituency.

“It’s going to be quite tricky.”