Written evidence submitted by Octopus Energy – (ITS0024)

How to cut costs for energy intensive businesses

The UK has the highest industrial electricity prices in the world according to DESNZ.1 370 of the largest energy intensive businesses in certain sectors get compensation through the British Industry Supercharger. But even for those 370 businesses, the Supercharger’s protection will erode due to the rising network costs from our outdated electricity market.

To protect existing British industries better and stand a chance of attracting new investment by getting electricity costs down, the government should take three important steps:

Reform the British Industry Supercharger so that compensation takes all costs into account, rather than selective elements. The Supercharger currently compensates for certain parts of the cost stack that comprises a final bill. A new approach is required to provide sustainable support to energy intensive industries, regardless of electricity market reform.

Implement zonal pricing. Zonal pricing will give parts of Great Britain some of the lowest wholesale electricity prices in Europe. This will immediately and directly benefit energy intensive industries already in those areas so they need less support. While system costs will be slashed for the whole country, more funds will be available to be targeted at those which still need support, where wholesale costs may rise.

1 DESNZ, Industrial Electricity Prices (IEA data). The UK still has 54% higher prices than the IEA median excluding taxes.

Targeting support better will mean less of a bill rise for households and other businesses, given the Supercharger is funded by an energy bill levy.

Guarantee that existing energy intensive industries will be better or no worse off than they are now under zonal pricing. It is right that industry should be given reassurance and stability through electricity market reform. The government should explicitly address this up front as part of the Review of Electricity Market Arrangements.

DESNZ and DBT should cooperate closely to maximise the benefits and minimise the risks of electricity market reform for existing industrial businesses. The prize for energy intensives is that generators will have to competitively sell their power to consumers to make sure they sell all of their power to maximise their profit, rather than having their volume risk socialised across bills, including industrial bills. Assurances for existing energy intensive businesses that they won’t be negatively impacted by zonal pricing are long overdue. Competitive prices in certain parts of the country will increase the chance of new investment in new industrial capacity, as we have seen in Scandinavia and America.

2 DBT, Government response: British Industry Supercharger Network Charging Compensation Scheme

3 Ofgem April 2025 price cap Annex 4, DBT British Industry Supercharger

1. Why Supercharger and market reform are both necessary

If the government does not implement zonal pricing, the Supercharger will quickly become less effective for all recipients because of rising network costs.

A key benefit of moving from national to zonal pricing is that it would reduce network costs, particularly the sub-category of constraint costs. Constraint costs have risen from £170m in 2010 to a forecasted £1.8bn in 2025.4 NESO has estimated they will either double or quadruple by 2030, to £3.6bn - £7.8bn in an unreformed market, depending on the progress of three critical grid projects in East Anglia The higher cost scenario is most likely given typical grid project construction timelines.5

The 60% Supercharger compensation is for the total sum of network costs. Higher compensation due to higher constraint costs means higher household bills. But a Supercharger recipient still has to pay more in uncompensated network costs (represented by the dark blue section) too.6 There are other network costs that will rise as well, such as grid buildout costs, but this is not represented in the below graph.

4 DECC, Impact Assessment of the Transmission Constraint Licence Condition (TCLC), 8 December

2011. National Energy System Operator, 2024. clean power 2030. Table 1, page 36. Link.

5 NESO, Clean Power 2030, p36. The costs will quadruple if three critical grid projects (AENC/ ATNC/SCD1) are not live. All three are still in the pre-planning phase. Planning can typically take up to four years and construction can take two to three.

6 This graph is illustrative, but was used using UK Steel and NESO figures: UK Steel network cost

£/MWh of £32. A conservative assumption of a 55% constraint cost from NESO’s winter constraint reports. 2025 constraint cost projections from Bloomberg and 2030 projections from NESO.

If the government implements zonal pricing, compensation might go down for some recipients.

Lowering constraint and network costs is good for everyone because the costs are socialised. But some Supercharger recipients may still see an overall rise in costs under zonal pricing without Supercharger reform, again because of the Supercharger’s design. Just as a 60% protection against higher network costs leads to more compensation in absolute terms, lower network costs will also mean less compensation.

A Supercharger recipient in “Zone A”, an example zone with a well supplied electricity market, would get lower network costs and lower wholesale costs. They save a lot of money because of market reform; it doesn’t matter if they get less compensation.7

But a recipient in less well supplied “Zone B” might see their wholesale costs stay roughly the same or even rise initially, but still get lower network costs and therefore less compensation. They would see a small rise, or not much of a direct benefit, in their outgoings for buying power. This is shown in the illustrative graph below.

Whether or not zonal pricing is implemented, the Supercharger needs updating. An updated market and Supercharger would mean limited support could be targeted better (see page 7).

7 This is an illustrative example and is not based on any modelling, it again just uses UK Steel figures for rough costs.

There are lots of energy intensive businesses that don’t get the Supercharger but need help.

The Supercharger only compensates 370 of energy intensives in certain sectors. Smaller businesses do not get the same protection from rising network costs and policy levies. The tech sector also receives no help.

Having the world’s highest electricity industrial electricity prices, with no realistic chance of them coming down again, threatens these businesses. Cutting wholesale, network, and levy costs across the country would help them, which is what zonal pricing would do.

For those in undersupplied zones, the locational price signal would attract investment in generation supply to lower prices. Zonal pricing is just a necessary first step for helping these consumers by mitigating further cost rises, but investment and building new generation, and better support or shielding in the meantime, may still be necessary.

If more energy intensives disconnect due to insufficient support, network costs will rise even more.

There will be upwards pressure on network costs as we invest in new grid infrastructure, which is a fixed cost. Higher constraint and balancing costs can vary, but NESO’s advice to the government on its Clean Power 2030 mission is clear that they are very likely to continue to climb with no market reform.

If large consumers shut down, they stop paying network costs. That means the costs are redistributed onto a shrinking base, raising them further for other energy intensives. That would necessitate more generous support, but domestic energy bills are already among the highest in Europe and the Treasury has very limited resources for direct subsidy.

Reform is necessary for keeping the cost of subsidies and cost compensation down.

Hydrogen producers receive Supercharger support and a subsidy for their product. Without reform to the Supercharger to better protect them and a market where generators are incentivised to cut their prices, the cost of the Gas Shippers Levy will be higher. This imperils the hydrogen sector’s business case and will mean higher gas prices for households and energy intensives, including those who receive Supercharger compensation.

Zonal pricing is used effectively in Scandinavia to attract new industry

Sweden and Norway have 3x and 5x lower industrial electricity prices respectively than the UK. Both use zonal pricing. Sweden is attracting industrial investment in its northern countries. Less than one in ten Swedes live in its northern regions, but energy is very cheap due to its renewable resources. There is £71bn worth of investment going into new steel production, minerals production, and tech.8 Wider infrastructure investment and labour is following the cheap energy.

We can’t expect our existing industrial assets to re-deploy to where the cheap energy is in the UK, but we should allow our industrial base to expand overall. Northern Scotland has double the population density of Northern Sweden, an existing industrial cluster in Aberdeen, and good ports. And it’s a lot warmer!

2. How to reform the Supercharger

The government could fix prices (as suggested recently by Professor Dieter Helm9) or redistribute support within the existing cost envelope, taking it away from the above-mentioned “Zone A” recipients, who access lower costs overall through zonal pricing alone, to “Zone B” recipients, who still need more support.

Any reform must keep costs to other consumers in mind. That is partly why market reform is necessary: it means some current Supercharger recipients will need less support as they have lower electricity costs altogether, freeing up existing resources to compensate others who don’t, and at least mitigating network cost rises due to greater balancing and inefficient grid buildout. This means a lower burden on all energy bills from the Supercharger.

Grandfathering for new assets is not necessary

8 Converted from the NZD 158bn figure in this report from the New Zealand government: Northern Sweden's Green Industrial Revolution – September 2024.

9 Professor Dieter Helm, The Times, Better energy policy could save British industries, 19 February

2025.

Lower electricity prices across the country and low prices in areas of high supply will make it more likely that investors will consider the UK for building their new energy intensive assets, so there is no need to grandfather them in. Electricity would be just one of many price signals businesses consider among land prices, labour prices, transport and telecoms connectivity. But the world’s highest industrial electricity prices that are being produced under the current nationwide pricing system are a bad signal across the entire country.

The government can do these reforms without breaking international trading rules

If the Supercharger’s focus on network cost compensation was to avoid falling foul of international trading rules, the government should deprioritise this concern. Given the new reality in the world of trading rules, the government should be bold and unapologetic in supporting British businesses.

It is also unlikely that a case would be brought forward. Even if it were, the UK would still have a strong case given the effect of compensation is the same as a subsidy. For extra legal protection, the government could point out that the redesigned Supercharger is and will remain critical for the decarbonisation and electrification of manufacturing, bringing about an environmental benefit. As well as regional development, this is how the Sustainable Industry Rewards for the renewables sector were justified by the government.

Conclusion: maximise benefits; minimise risks for energy intensives

The government should confirm it will reform the British Industry Supercharger to better protect energy intensives no matter what its decision. This will be less costly to do and therefore more likely to happen with zonal pricing. It should also implement zonal pricing to constrain the rapid rise in constraint and wider network costs, and make the places in the UK with renewable energy abundance cost competitive for investment regarding electricity.

Unless it does this critical market reform, there is a real risk that it becomes unaffordable for many energy intensives to continue operating, despite recent compensation mechanisms coming into play, right as it is more unaffordable for the government or billpayers to increase their support for them. This could trigger a doom spiral for British industry, with disconnections triggering more disconnections. With market reform, the UK can better protect its existing industry and stand a much better chance of attracting new industrial investment.

What is zonal pricing? And the three big reasons we need it.

● Zonal pricing splits an electricity market into zones, with each zone having an electricity price for its local area. It’s already used in Norway, Sweden, New Zealand, Italy, America, Canada, and more to great effect.

● The UK currently has an outdated system that’s preventing us from cutting energy bills. Instead of zonal pricing, we have a single, nationwide zone for electricity with one price, regardless of local supply and demand. That means everyone pays the highest price possible. It’s like Inverness residents paying central London house prices.

1. Zonal pricing would cut electricity bills now and avoid unnecessary rises.

● Prices have gone up partly due to higher “balancing costs” which must be paid to operate the grid. Costs rose from £170mn per year in 2010 to

£1.5bn in 2024, adding to peoples’ energy bills. The nationwide price also means we export or import electricity from abroad at inappropriate times and use batteries inefficiently, raising costs. This is why the energy system operator has recommended moving to zonal pricing.

● We are building a new energy system. But without price signals to show what is needed where accurately, we will build inefficiently. That means more infrastructure like power lines will be built than we necessarily need, and all that extra infrastructure is paid for through energy bills.

2. We need zonal pricing to unlock the beneﬁts of renewables for the public.

● The current market lets generators proﬁt by building a wind farm and then being paid by the operator to switch it off so it doesn’t overwhelm the local grid. Some wind farms make millions without spinning. This slows net zero down. Zonal pricing would cut prices when there’s lots of energy, keeping wind farms working and lowering bills.

● Creating more zones would mean areas that already have renewables would have cheaper electricity, so new businesses would be more likely to invest and build there. But this won’t create a postcode lottery: all areas would save money because the system would run more efficiently, even if some areas would save more than others.

3. Zonal pricing is necessary to get to a cheaper, smarter whole energy system.

● We need a smarter energy system with cheap renewables and electriﬁed transport and heating because the UK will never have sway over oil & gas prices. That means using energy smartly and efficiently.

● Zonal pricing is necessary for a smart system to work well because it improves operational signals. Rather than paying local wind farms to turn off when it’s windy, local households and businesses would get lower prices. They’d either use the cheap, green electricity to do their washing or charge their car for example, or to store it in batteries for when they need it later.

What does zonal pricing mean for Scotland speciﬁcally?

Scotland would go from having the highest electricity prices in the world to among the lowest in Europe.

● Scotland has very high bills, despite renewable energy abundance. The UK has among the highest electricity bills in the world. Scotland fares no better even though it generates more power than it uses. Scottish standing charges are even 50% higher than London standing charges.

● Zonal pricing would save the Scottish public and businesses money. If Scotland had two zones, those in the northern zone (for example in Aberdeen) would have saved £265 off their annual bill and those in a southern zone (like one in Glasgow) would save £71 in Q42024. The whole of the UK would have saved overall from operational efficiency, too.

Scotland should have lower bills, but nationwide pricing won’t allow it

● Zonal pricing is the enabler of even larger savings with smart tech. A smart heat pump can cut bills by £300 and a smartly charged EV can cut fuel costs by £900 per year. Octopus is already building new Zero Bills Homes (zero bills guaranteed for ten years) using smart tech. Zonal pricing would make smart tech give even bigger bill savings, instead of charging customers extra to pay wind farms to turn off.

Scotland would be more attractive to business and industry, boosting growth.

● FTI analysis for Ofgem shows a £17-19 per megawatt hour of electricity saving in Scotland. For context, this is nearly as much as the support provided by government (with the money raised by taxing household energy use, raising household bills). Sweden is using zonal pricing for a

£71bn industrialisation programme in its north. We could do the same.

Why should the Labour government implement zonal pricing?

The government’s promise on energy - “our clean power plan will cut energy bills” - would be fulﬁlled. Without zonal pricing, it’ll be proven wrong.

● Scotland has a third more onshore wind than the rest of the UK combined while being a third of the land mass, but its energy bills are not coming down. Shetland, which is covered in wind turbines and will soon be surrounded by offshore wind, has double the average UK bill. This undermines support for the clean power mission and net zero.

Labour said it would cut energy bills. Without zonal pricing, bills will rise.

● The government promised to cut bills by £300, but extra payments for the network will mean an additional £150-£200. NESO forecasted network costs to rise to £6.6bn by 2030 without market reform, including £3.7bn to turn wind and solar farms off and gas plants on, doubling from today. Large levies for hydrogen, carbon capture, and industrial electricity prices will also raise energy bills, so savings elsewhere are vital.

We will not reach the 2030 clean power target without zonal pricing.

● Power lines are expensive and take a long time to build, so we should only build what we need. Without zonal pricing, we will build in the wrong places and need more power lines to move the electricity over longer distances. That makes reaching the 2030 target harder. The purple bars on the right show how much investment we need to reach 2030 without reform compared to what we have managed so far in pink. Zonal pricing would help to get the purple bars down.

We’re behind on grid investment; zonal pricing would make it easier

Why hasn’t zonal pricing been implemented already?

● DESNZ launched the “Review of Electricity Market Arrangements” in July 2022, but a decision still hasn’t been made. “REMA” was supposed to update the electricity market because it was outdated and not passing on the savings renewables should now provide. There have been disruptions to the process like the general election, but it is mostly down to the debate over zonal pricing.

● Supporting zonal pricing is the National Energy System Operator, the Energy Systems Catapult, the Association of Decentralised Energy, E3G, the Regulatory Assistance Project, pro-infrastructure campaign Britain Remade, Octopus Energy, Ovo Energy and data centre, green hydrogen, and battery companies.

● Opposing zonal pricing are the big incumbent generators such as RWE, SSE and Scottish Power. The energy sector is naturally conservative and doesn’t like change, including some invested in renewables. Many of those opposing zonal pricing also opposed Contracts for Difference, which cut Scottish onshore wind prices by two thirds and was critical for growing the offshore wind sector.

● Large generators claim pro-consumer reform will disrupt investment, but this hasn’t happened before. Over 50% of renewables are in OECD countries with zonal pricing or even more granular “nodal” electricity pricing. Developers who oppose locational pricing here have been very happy to invest in places like Sweden and Texas, which have markets with location-based pricing.

● No credible alternative to zonal pricing has been proposed. The government acknowledges that ‘do nothing’ is not an option and system reform is urgent. Any attempt to keep the system under a national price would likely mean putting up network charges for Scotland to prevent grid overload and discourage new investment, with no bill savings for customers.

● The real reason the legacy companies support the status quo is they proﬁt from the current system at the expense of the public. The system maximises proﬁts regardless of a wind or solar farm’s usefulness. Incumbent interests are comfortable making extra money for a badly placed wind farm on the backs of bill payers because they don’t have to pay for the resulting higher energy bills and extra power lines, in fact they make money from them.

March 2025